If you’re moving home and have either plenty of equity or savings you can use for a deposit, plus a decent income, it can be straightforward to finance your next purchase via a traditional mortgage.
This is how most people ‘consumed’ property in the past, but as lifestyles, earnings, investment strategies, and the supply of property have shifted over the years, there are now many different ways to put a roof over people’s heads and lots of different options for financing property purchases.
Buying a property to let
If you are buying a property to rent out, you will need a buy-to-let mortgage. The big difference is that while standard residential mortgage lending is based on your income, the amount you can borrow for a BTL mortgage is mainly determined by the potential rent, however you would still required to have an income of at least £25k from most lenders.
Lenders usually require a minimum ‘rent coverage’, where the rental income is between 125% and 145% of the mortgage repayment amount. If you are a higher-rate taxpayer, the cover required may be higher as you can’t deduct all the financial costs from your rent anymore.
Although BTL mortgages are now commonplace, around 75% of products are still only available through brokers - i.e. you can’t access them by going directly to a lender yourself. And if you’re planning to let the property as a House in Multiple Occupation (HMO), you will need a specialist BTL mortgage, which only a limited number of lenders offer, so it’s even more important to use a broker.
Buying at auction
Suppose you’re looking for a fixer-upper, whether for yourself or as an investment property, or you just fancy a property you have seen online and it’s at an auction, such as First for Auctions. In that case, finance works slightly differently from buying on the open market. You will need to have finance in place before bidding because contracts are generally exchanged when the hammer falls, and you usually only have 28 days to complete. Thos would generally be in the way of briding finance.
Specialist auction finance companies will generally lend a maximum of 75% of the purchase price, and fees and interest rates will be higher than with a traditional mortgage, but they can turn things around within a few days.
Note that if a property is not habitable—e.g., it doesn’t have a functioning kitchen or bathroom—it may be unmortgageable. In that case, if you don’t have the capital to make a cash purchase, you will need to look into the possibility of taking out a bridging loan until the property can be mortgaged.
Renovation mortgages
If you’re buying a property that needs work, you may be able to get a specialist ‘house renovation mortgage’, where you borrow money for both the property and the renovations. It’s important to know that if a lot of work is required, the lender may withhold some of the funds until specific essential repairs have been done.
Green mortgages
If the property you’re buying already has an EPC rating of A or B, you may qualify for a ‘green’ mortgage, where lenders reward eco-friendly homeowners with lower interest rates or cashback.
If you’re buying a property with a lower energy rating but planning to make improvements, you may be able to borrow additional money at a discounted interest rate or get cashback for making certain upgrades. For instance, at the time of writing, Halifax offers up to £1,000 cashback for fitting a heat pump. Nationwide allows mortgage holders to borrow between £5,000 and £10,000 at 0% interest to carry out green home improvements.
For first-time buyers
While some first-time buyers (FTBs) might have enough income and savings to take out a traditional mortgage, many struggle with affordability, particularly when it comes to saving for a deposit.
The good news is that there is plenty of help out there for FTBs, including:
- Mortgages that can be secured with a guarantor (usually parents)
- 100% Track Record Mortgage for those who can prove at least 12 consecutive months’ rental payments within the last 18 months – and there’s no need for a guarantor
- The Family Springboard Mortgage, where a ‘helper’ puts 10% of the purchase price in an account as security on the loan, enabling the FTB to borrow 100%
- With the new build Deposit Unlock Scheme you can purchase a property with just a 5% deposit
- For buyers in England, the First Homes Scheme where certain homes are available to FTBs for between 30% and 50% less than their market value
If you’re looking for your first home, Mortgage Scout can explain all the financing options available to you and advise which might be most suitable.
Shared Ownership
This option, where you purchase a percentage of the property and pay rent on the remainder, is increasingly popular in areas where prices are higher than average, such as London and Edinburgh. Because you only buy a proportion of the property – usually between 25% and 50% - the deposit amount and mortgage payments are more affordable. You can find available properties in your area through SOWN.
What to consider if you’re thinking about buying with a partner
Traditionally buying with a partner has meant a romantic partner, but times are changing. In fact, our research found that 52% of prospective buyers said the financial situation of the past few years has meant they have changed who they plan to buy with. This is especially true for younger buyers, with 23% of 18-24 year olds looking at buying with a family member or friend. Financially, it can mean that you might be able to afford a more expensive property or simply help you build a bigger deposit than going it alone. However, there are things to consider when buying with a partner to ensure that you are both mortgage ready.
Mortgages
The benefits of having a buying partner doesn’t just come from having deeper pockets, but also gives you the chance of securing a joint mortgage, allowing you to borrow more together, so you can secure a larger and perhaps more suitable place to live
A joint mortgage works much the same as having one solely in your own name except both you and your partner’s finances and credit scores are considered.
There are drawbacks to consider when getting a joint mortgage – for example, your partner’s credit score could damage yourself their own financial position deteriorates after moving in, as you are both responsible for payments, and this could prove difficult to maintain should your partner not be able to pay their fair share. This means it is important you are confident and trust the person you are buying with as being reliable. Do speak to an expert about the decision of sharing a mortgage, to ensure you fully understand what it means and its risks.
Decide ownership
Although obtaining a mortgage when buying with a partner means you are equally responsible for the repayments, this is not always the case when it comes to ownership. A joint mortgage doesn’t always mean joint ownership.
There are various types of ownership that warrant consideration when it comes to taking the leap to buy a home together:
Joint Tenancy: each tenant has equal rights to the property. It doesn’t matter who paid more towards the property, you are viewed as a single entity.
Tenancy in common: This kind of tenancy allows each tenant to hold a different share of the property. For example, if you provide 40% of the house deposit and pay 40% of the mortgage, your share will be 40% of the house price, whether it goes up or down in value.
Joint borrower sole proprietor
It is important to consider what type of ownership is best for you and speaking with a mortgage advisor should help in deciding what is the best option and will help you to get mortgage ready, taking into full consideration your future plans and priorities, as well as your current affordability.
Buyout agreement
Although buying a home with a partner is exciting, it is essential that you protect your own interests. Whilst married couples have certain rights when it comes to their shared home, this is not the case for unmarried couples.
One way you can protect your rights is by getting a cohabitation agreement. The agreement plans how you and your buying partner organise your finances and property while living together and what the protocol will be in the case of splitting up, becoming ill or passing away.
This agreement can be arranged by a family solicitor and can also be utilised by friends or family who are moving in together. Whilst the agreement may seem pessimistic, one must not overlook the importance of protecting your respective interests and futures.