The government will guarantee loans to both first-time buyers and current homeowners worth 95% of the purchase price on properties valued up to £600,000. Whilst this scheme will allow many more people to be able to get on the property ladder, there are some additional considerations to make when applying for a small deposit mortgage.
What does your credit history look like?
Whilst having a good credit score is nearly always essential, customers will need to have extremely clean credit files, as the scoring and background checks will be very comprehensive for a small deposit mortgage. Keeping up with payments like monthly utility bills and your mobile phone will ensure you have a good credit score, serving as evidence to lenders that you are able to pay back debts. Ensure that you don’t have a joint bank account with anyone who has a bad credit score as their activities could negatively impact you.
Can you afford your mortgage?
Although the mortgage guarantee scheme means you will be paying a lower deposit, it also means you will need to take a bigger mortgage, resulting in larger monthly repayments. Currently, most mortgage lenders face restrictions where no more than 15% of their new business can be through offering mortgages that are over 4.5 times annual income, so whilst some customers will potentially receive a mortgage over this level, it’s likely lenders won’t risk higher LTI (loan to income) lending for 5% deposit mortgages.
For those looking to buy a house alone, this may be challenging to meet the financial requirements, for couples this may be easier. However, mortgage interest rates can often be cheaper than monthly rent, which can make paying a mortgage more cost-effective in the long run. Putting together a budget before you start the house-hunting process is a good idea to make sure you could pay the monthly mortgage payments, along with other monthly expenditures.
Have you been financially impacted by the pandemic?
Mortgage lenders will be cautious about future employment prospects if you have been financially impacted by the pandemic. If you have been furloughed, had working hours reduced, or taken mortgage holidays, it is likely that lenders may not be able to provide you with a mortgage. You may be asked for bank statements, your last P60 and proof of deposits as proof of income so they can see you have a stable income, suitable to support your mortgage repayments.
Like most large financial decisions, it is a good idea to talk to some experts before you start to apply for any mortgages so you can be sure to have a good understanding of all the financial implications.
