We all know buying a house can be expensive business, but there several ways to keep your costs under control. The key thing is to know how much you’re planning to spend, and how big a mortgage you can get, before you start house hunting.
Salary multiples
Mortgage lenders used to operate a fairly strict ‘three times the annual salary’ policy, but the past several years have seen a shift towards looking at affordability, rather than just considering salary multiples. A lender will take your financial habits into account, so if you run a tight ship with regard to your finances, you may be able to get a bigger mortgage than you would do under the traditional guidelines. Conversely, if you are struggling with credit card or other debt, you are unlikely to be offered as much.
These days, the majority of lenders will lend between 3.5 and four times your gross salary, although some lenders may offer you more depending on the size of your deposit and your monthly financial commitments.
If you're buying with a partner, many lenders will throw in the equivalent of your partner’s annual salary to the amount they're prepared to lend you.
So if you're on £25,000 a year and your partner is on £20,000, you should be able to borrow around £157,500 (£45,000 x 3.5). If your lender is willing to lend you four times your joint income, you can raise a slightly bigger mortgage – £180,000 using the same example figures. If you get any additional income from bonuses or commission these may be taken into account as well.
The importance of a deposit
The 100% mortgage is probably a thing of the past, at least for the next few years. If you want to buy a home, you will need to pay for at least part of it up front. A few mortgage lenders will still loan up to 95% of the value of the property, but you will have to pay a higher rate and fork out for large fees. So it’s best to try to get together at least a 10% deposit (which means you’re borrowing 90% of the property value, or £90,000 on a £100,000 property).
Almost as a rule, the larger your deposit, the lower the rate of interest you are likely to get. A larger deposit also reduces the risk of you going into negative equity. This nasty situation arises when the value of your house falls to below that of your mortgage. Once this happens it becomes incredibly difficult to move house as if you sell up, the proceeds won't cover your mortgage, meaning you will need to find additional funds from elsewhere.
Stamp duty
Stamp duty is a tax you have to pay if you are buying a house or land. The amount of stamp duty you pay depends on how much you are purchasing the house or land for.
So stamp duty currently works on a sliding scale like this:
| Value of your property |
| £175,000 or less: |
Nil |
| £175,001-£250,000: |
1% |
| £250,001-£500,000: |
3% |
| £500,001 or more: |
4% |
Stamp duty works on a ’slab basis’, so the above percentages apply to the whole purchase price. For example, a house priced at £250,000 would attract an SDLT of £2,500, but one of £250,001 would be liable to SDLT of £7,500. The result is that SDLT has a distorting effect on the market, because a house is very difficult to sell at prices just above each threshold, for example, £255,000.
Stamp duty can’t be added to your mortgage and so has to be paid in cash before you can move in. Stamp duty is something you will need to keep in mind when assessing how much you can borrow, and accordingly, the price range you will need to house hunt within.
Mortgage, deposit, stamp duty… what next?!
Sadly, that’s not all you’re going to have to be prepared for as you buy a home. Once you have found the home of your dreams and had your offer accepted, you’ll find that all sorts of people come crawling out of the woodwork asking you to stump up for additional expenses.
The most obvious of these is the cost of moving your furniture from one place to another, but you will also need to consider valuation, survey and legal fees (probably in the region of £1,000 to £2,000). It’s best to keep these costs in mind when setting aside a deposit, as you don’t want to find yourself scraping the bottom of your bank account before you even make an offer!
Back to our main mortgages page »