Buying your first home is an incredibly exciting time, but it can also be long, complex, and somewhat daunting, especially if it’s your first time going through the process.
For the majority, buying a house will be the largest financial commitment you will ever make, we don’t think it should be more stressful than it needs to be because you choose to be a contractor.
Stricter lending criteria and the misunderstanding surrounding payment structures means securing a mortgage in your situation can often feel impossible.
At CMME, we believe taking your first step on the property ladder should be an exciting and joyous time, no matter what your chosen career path is, that’s why we’ve helped; contractors, freelancers, doctors, medical professionals, business owners and many more. One of our experienced mortgage consultants will provide you with straightforward, clear advice that will help you understand the entire home buying process, to ensure you understand everything before moving forward.
What’s in this guide?
- Is a mortgage right for you?
- How much could you borrow as a first-time buyer
- What deposit will you need?
- How do you apply for a mortgage?
Is a mortgage right for you?
It is now much harder for everyone, let alone contractors and independent professionals to secure a mortgage. Historically lenders could offer mortgages solely based on a deposit and a good credit profile. Economic factors, such as the credit crunch, have all contributed to the more conservative approach towards lending within the housing market.
Although the Government has launched different schemes, it is now about ensuring you look as attractive financially as possible to prospective lenders. One of the key things you need to ask yourself before you start looking for a property is whether you can realistically afford a mortgage. Review your finances with a fine-tooth comb and then look at what a mortgage is likely to cost you each month. If you feel you can afford it, make sure you then account for rises in interest rates in the future.
Calculator: Estimate your monthly repayments
How much could you borrow as a first-time buyer?
In the past, most lenders worked out what they would lend you by typically multiplying your sole or joint income by a fixed number. This is now not the case.
Currently, most lenders look at a full financial picture, including:
- Your monthly pay
- Income from investments
- Income from pensions
- Income from child maintenance or grants
They will also look at your available credit, how much spare cash you have each month and other bills/debts etc.
This information will allow a lender to develop a good understanding of how much you will realistically be able to pay back each month, thereby helping them to calculate how much they will be willing to let you borrow.
Make sure your spending habits are allowing you to live well within your means, and if you’re able to pay off any unsecured loans and credit cards, as they can impact your borrowing potential.
Using an online mortgage calculator can be a great tool with your initial mortgage planning. With an estimation of how much you could borrow planning your deposit, repayments, fees and potential property can become much simpler.
Calculator: See how much you could borrow
What deposit will you need?
Do I need a deposit?
To allow lenders to consider loaning you money, you’ll need a substantial amount of up-front cash: a deposit. A greater deposit means you will have access to better interest rates. However, most mortgages need at least 5% of the property value, which for some, can be a substantial amount of money. The money may come from hard work and saving, money from parents/grandparents, or even from receiving an inheritance. Either way, the larger the deposit, the better the rate you will receive. This, in turn, means lower monthly payments and a cheaper mortgage overall. However, obtaining that first deposit can be hard for some.
Learn more: Mortgage deposits
Schemes to help with deposits
In recent years, there have been a few schemes set up by the government that can help you to achieve your deposit goals.
Help to Buy ISA
This was set up by the government in December 2015. People over 16 can earn interest of up to 4% on money in the ISA and get 25% added on top when they withdraw the money to use it for a mortgage deposit.
The Help to Buy ISA is available for new savers until 30th November 2019, however, you can still keep saving in your account if you opened it before then. You must claim your bonus by the 1st December 2030.*
This was set up by the government in December 2015. People over 16 can earn interest of up to 4% on money in the ISA and get 25% added on top when they withdraw the money to use it for a mortgage deposit. The Help to Buy ISA is available for new savers until 30th November 2019, however you can still keep saving in your account if you opened it before then. You must claim your bonus by the 1st December 2030.*
Help to Buy Equity Loan
Equity Loans are open to both first-time buyers and home movers on new build homes in England. Once you have acquired a 5% deposit, the government will add on a loan of up to 20%, meaning that you’ll have a total of a 25% deposit. No fees will be applied for the first 5 years of owning your home. In the sixth year, a charge of 1.75% of the loans value will be applied.
Beyond this, the fees will increase each year in line with the Retail Price Index (RPI). In November 2015, the Government announced an extension of the initiative up to 2021.*
Help to buy London Equity Loan
Due to the increased property prices in London, Help to Buy will lend you up to 40% of the cost of your new home up to the value of £600,000 in all London boroughs. Along with your deposit of 5%, this will give borrowers a 45% deposit to purchase a new build property.
As with the standard help to buy equity loan no fees will be applied for the first 5 years of owning your home.
Learn more: Help to buy guide
How do you apply for a mortgage?
Qualifying for your mortgage could not be more straightforward once you have worked out your budget and affordability. As a specialist broker for independent professionals and complex incomes we have negotiated special underwriting with certain high street lenders.
We can either use your gross annualised contract rate or your limited company accounts to assess the best option for you and how much you can afford to borrow. This ensures the amount you can borrow is based on what you actually earn, rather than what you draw as income. So rather than looking at the income you took from your business, we could use the contract rate you charge or your annual accounts to work out how much you can borrow.
Doing this allows you to borrow more. Typically, lenders will only look at your taxable income via the tax saving methods that you employ, but at CMME we look directly at your full income pre-tax mechanism when calculating mortgage affordability.
Learn more: Application documents for contractors
Learn more: Application documents for business owners
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