When a lender is looking at giving you a mortgage they will be looking for risk factors to determine how much to lend you and at what interest rate. Gone are the days when lenders just calculate four times your annual income to determine your mortgage amount. To determine amount to lend and at what interest rate to lend, lenders will look at the following factors: your credit score, how much you can afford to repay, moveable equity from a previously sold property and the size of your deposit.
Lenders will also look at your risk value when deciding on which interest rates to offer you. If you have previously owned a home, have a steady income and a good credit score you will most likely be considered less of a risk and will qualify for lower interest rates. If, however you are new to the housing market, lenders will consider you a greater risk as you may not yet have an established credit rating and they cannot determine how well you will repay the mortgage. If this is the case you will most likely have a higher interest rate offered to you by the lender. One way to counter this would be to have a higher down payment, wait until you have a more established credit rating or consider buying a cheaper first property to get you started in the housing market.
The size of your deposit is an important factor when it comes to amount and interest rate. Lenders will often take a close look at your loan to Value (LTV). For instance the higher the LTV usually the higher interest rate you are afforded by your lender. Typically lenders are looking for 10% of the total value of the property (£20,000 is 10% of £200,000), but if you are looking for better interest rates then you will want to shoot for 25% or higher, with 40% usually achieving the best deal. First-time home buyers can find mortgages with higher LTV’s such as mortgages with a 5% deposit or what is called a guarantor mortgage where you have a 0% deposit. Remember that although the lower deposit mortgages can be attractive it also means that you have less value in your home initially and will most likely be paying a higher interest rate to start with. There is definitely value in taking the time to accumulate a larger deposit.
Mortgage costs are one thing but there is more than just the property price to consider, remember that there are other costs associated in buying a property. There is legal fees, stamp duty, moving costs and property insurance to consider as well. Make sure that you are not just thinking about the deposit and that you have also saved for these other costs as well.
Take your time to consider all the factors that go into applying for a mortgage, sometimes taking that extra one or two years to bolster your credit rating and saving for a more robust down payment can be the difference between a high or low mortgage interest. Knowing that interest alone can increase your payments and could mean the difference between being able to afford your dream home and getting stuck in a property that isn’t able to grow with an expanding family.