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Buying your home is the largest purchase you are likely to make and before starting you need to determine how much money you have for a deposit and what you can afford to borrow. Lenders can provide you with a mortgage in principle and the amounts you can borrow are based on affordability taking into account your outgoings.

London City Mortgages can help you with this process whether you are a first time buyer or re-mortgaging your home or investing in a buy to let property. You can start by asking for a free online mortgage quotes from our adviser which will include helpful guide on the amount you are likely to secure from a mortgage.

What is a mortgage?

A mortgage is a loan from a lender taken out to buy a property or land. The length of the mortgage is usually 25 years but you can choose a shorter or longer term. The lender could insist on a shorter term, such as for older applicants, as they may have a maximum age limit for their mortgage.

The loan is secured against the value of your home until the end of the term or you pay off the mortgage, such as when you sell the property. If you cannot maintain the mortgage payments the lender may agree alternative repayment terms or repossess your home to sell in order to recover their loan.

Working out affordability

Lenders are required to determine if the mortgage you are applying for is affordable so you need to work out beforehand what you can afford. Lenders will reject applications that do not meet their stringent requirements so you need to do this exercise first to avoid disappointment later. Lenders will take into account your outgoings such as the following:

How much you can borrow from a lender will depend on your gross income and outgoings. If you are borrowing more than £500,000 they may also apply a cap of four times your gross income.

Lenders also apply a ‘stress test’ to see if you can afford paying up to 7% interest on your mortgage should interest rates rise further. They will want to see proof of your income and expenses such as your payslips and bank statements to ensure you can keep up the mortgage repayments.

Deposit for your home

Raising the deposit for a property can be difficult as property prices continue to rise, although there are many mortgages and schemes that allow you to place only a 5% deposit.

If you have a larger 10% deposit there will be a much greater choice of lenders and with a 25% deposit lender rates are very competitive. There is also assistance if your income is not high enough such as the government’s Help to Buy scheme for first time buyers and home movers. Housing Associations can also help you own your own home with Shared Ownership schemes.

Lenders require borrowers to show they can afford to commit to a property purchase by making a deposit. The larger the deposit the lower the risk to the lender and therefore they can offer a much better mortgage deal.

The amount you borrow is shown as a loan to value (LTV) percentage. For example, if you have a £20,000 deposit on a £200,000 property this would represent 10% of the property value. This represents a 90% loan to value and the mortgage is secured against this portion.

If your LTV is lower you will receive a lower interest rate from the lender as the risk to them is much lower. With a 75% mortgage LTV you can expect very good interest rates although with a 60% LTV you will receive the best rates in the market.

Paying back your mortgage

A mortgage from a lender is a loan and the amount you borrow from them is known as capital. The type of mortgage will depend on whether you want to repay the interest only or interest and capital repayment.

If you selected a repayment mortgage each month your payments would include interest on the loan and the repayment of capital. As you pay back the capital every month the interest you pay will reduce until at the end of the term you will fully own your property. As you are paying interest and capital the amount you pay each month is greater than an interest only mortgage.

If you select an interest only mortgage the payments you make will only repay the interest and at the end of the term the capital borrowed must be repaid as a single lump sum. As you are not paying off the capital with this option it means your monthly payments are lower than a repayment mortgage.

As an example, if you bought a home for £250,000 and had a £50,000 deposit, the loan to value would be 80% of the property value giving a mortgage of £200,000 for a 25 year term. Let’s say your mortgage rate was 2.75% this would mean your interest only payment would be £458 per month. If you had a repayment mortgage your payment would be £922 per month.

At the end of the 25 year term with the repayment mortgage you would own your own home with no more payments to make but with an interest only mortgage you would owe £200,000 to the lender.

With the changes in the Mortgage Market Review (MMR) lenders have tighter criteria for interest only mortgages and you would need to show you have a repayment vehicle, such as an Individual Savings Account (ISA), endowment or pension lump sum to repay the capital.

To keep the payments down in the early years, some lenders would allow you to combine both interest only and repayment and change this when your income is higher in the future.

Finding the right mortgage

After you have decided on the method of paying back your mortgage there are a number of mortgage types to consider are as follows:

The standard variable mortgage is the main basis from which all other types are developed. All lenders have a standard variable rate which is linked to the base rate set by the Bank of England. As the Bank changes their interest rate the standard variable rates will also change making this option volatile over time.

Many lenders make special offers to borrowers with a discount mortgage that is cheaper than the standard variable for a fixed period of time, such as two or three years. At the end of the period the rate returns to the standard variable and during the term can go up or down with interest rates. Another version is the tracker mortgage which is linked specifically to base rates and can change over time.

One way to limit how high the rate rises is to have a capped mortgage and this would cost you more as it is guaranteed not to rise above a certain level.

If you would rather not have a variable rate you can have a fixed rate mortgage although this is slightly more expensive as the monthly cost is guaranteed not to change. A fixed term mortgage has a typical term of two to five years and is popular when interest rates are predicted to rise in the future.

As an alternative you could consider an offset mortgage where you link your savings and current account to your mortgage. The advantage here is you continue to pay your mortgage each month and make over payments using your savings.  This can reduce the amount of interest you pay over the term or you can even clear the mortgage and own the property early.

Help to buy schemes were set-up by the government to help all people struggling to save for a deposit. You can be a first time buyer or home mover with limited equity.

There are two schemes running, the first one is called Equity Loan which is available only on new build properties and the second called Mortgage Guarantee for both new build and pre-owned properties.

Help to Buy – equity loan

The Equity Loan part of Help to Buy is scheduled to run from 1 April 2013 until 31 March 2020 or until funding available for the scheme runs out.

There is no maximum income requirement for the equity loan scheme but it is available only on new build homes.

It can be accessed by both first time buyers and home movers for properties up to £600,000 in value in England and must be your only residence. With different schemes running in Scotland capped at £400,000 and Wales capped at £300,000.

It is not available for investment or buy-to-let properties or mortgages on an interest only basis, you must select a repayment mortgage to qualify.

The benefit of this scheme is that you only need a deposit of 5% of the property value and the government will provide a further 20% from the Homes and Communities Agency (HCA) making a deposit of 25%.

The loan to value (LTV) is very low and you will then need to arrange a mortgage of 75% of the property price. In this case the interest you will pay will be competitive when compared to other mortgages with high loan to value, such as a 95% LTV.

The big advantage of this scheme is the equity loan is interest free for the first five years. In year six a charge of 1.75% would be payable from this point onwards and will rise annually by the retail price index (RPI) plus 1%.

The equity loan must be worth at least 10% of the value of the property. You can repay the loan from the government at any time without penalty subject to a minimum amount of 10% until the loan is cleared.

You must pay back the loan after 25 years or when you sell your home. The value of the loan will depend on the market value of your property at that time as its share will benefit in the rise in property prices.

When you apply for an equity loan Help to Buy scheme you need to meet the lenders requirements, affordability and credit score checks.

London Help to Buy scheme

Extended in the Autumn Statement and launched in February 2016 the London Help to Buy scheme offers loans of up to 40% compared to only 20% for the rest of the country.

It is available on the equity loan basis for both first time buyers and home movers in the capital for new-build homes only and is not available to be let out or purchased as a second home.

The equity loan can be used to buy new properties in Greater London valued up to £600,000 with the maximum equity loan value offered of 40% and a minimum 5% deposit. The balance of 55% is a mortgage with borrowing limited to 4.5 times your earnings.

Loans are interest free for five years and after this time you will be charged interest starting at 1.75% which will rise each year in line with inflation plus 1%.

Help to Buy – mortgage guarantee

This scheme is scheduled to run from 8 October 2013 until 31 December 2016 or until funding available for the scheme runs out. The participating lenders in the scheme are as follows:

The mortgage guarantee part of Help to Buy is different from Equity Loan in that you can use this for both new-build and existing homes. Homes with a value of up to £600,000 are eligible and there is no limit to the level of your income.

It is not available if you intend to rent out the property such as a buy-to-let property, or for buying a second home. Only a repayment mortgage can be selected the scheme, an interest only mortgage is not eligible.

A buyer only needs a deposit of 5% of the property value and the 95% balance is provided by mortgage from a participating lender. As the loan to value (LTV) is very high so will be the risk to the lender, so the interest would be higher than the Equity Loan part of Help to Buy.

To protect the lender from this risk the government provides a guarantee to the mortgage lender of up to a further 15% of the property value.

This is an agreement between the government and lender and does not affect the buyer. If the property value falls by more than 5%, the lender is protected. In exchange for the guarantee the lender will pay the government a commercial fee for every mortgage in the scheme.

This guarantee it is hoped will help keep the cost of the mortgage down as the risk to the lender has been greatly reduced.

When you apply for a mortgage guarantee Help to Buy scheme you are subject to the same checks as any other application such as a credit score, meet the lenders requirements as well as affordability checks.

Shared Ownership schemes allow you to part buy part rent a property and are provided by housing associations and can be used for first time buyers.

If you do not have the earnings to buy a property this method of buying allows you to buy a share of your home initially from 25% up to 75% with a deposit and mortgage from a lender and pay an affordable rent on the remaining share.

Shared ownership is available for new build homes and existing homes through housing association resale programmes. Properties in England are always sold on a leasehold only basis and you must purchase the maximum percentage that you can afford.

The price you pay for a property is usually discounted by £10,000 to £15,000 to the market value depending on the location.

You can buy an additional share of your property over time until you own it outright.

Who can apply for shared ownership?

There are a number of criteria to meet before you can consider shared ownership as follows:

Many associations give priority to people living in the county or borough of a shared ownership property.

How does it work

For first time buyers or previous home owners that cannot afford to buy shared ownership offers the opportunity to buy at least a 25% share of the equity in the property up to a maximum of 75% initially.

For example, if the property you are buying is worth £200,000 and you decide to buy a 50% share you will need to pay £100,000. You will need a deposit and find a lender for a mortgage in the same way you would buy any other property.

If you have a 10% deposit or £10,000 you will need a mortgage of £90,000. The larger the deposit the lower the interest rate you would pay for the loan as the risk to the lender is reduced with larger deposits.

If you have a deposit of 40% or £40,000 in our example you would be offered the best interest rates on the market from variable, discounted to fixed rate mortgages on a repayment basis which includes interest and capital payments.

Lenders would determine your ability to afford the mortgage taking into account your income and outgoings such as child care, holidays and living costs. If your costs are low you could be offered a multiple of 4 or a maximum of 5 so for a loan of £90,000 your income would need to be from £18,000 to £22,500.

In our example, the remaining £100,000 would have a rental charge and this would typically be from 2.5% to 3.0% depending on the housing association.  So if this was 2.75% it would mean the rent you pay would be £229 per month.

Buying a larger share

You can buy a larger share of your property over time until you become an owner occupier and this is known as ‘staircasing’.

Each housing association with have their own terms regarding how you can purchase a greater share of your property. Usually you can buy 10% tranches after you have lived in the property for a year until you reach 75%. After this level you will need to buy the housing association out of their 25% share in one final amount.

If you are older, aged over 55, the rules are different as the scheme is called the older People’s Shared Ownership’. In this case the maximum share you can have is 75% of your home and once this is attained you will not have to pay rent on the remaining share.

The price you pay for the share will depend on the price of your home at that time based on a valuation arrange by the housing association. The amount you pay will be greater if the value of your home has increased over time, however, you will receive a discount to the market value for the additional share you purchase.

Selling your home

If you own 100% of your property you can sell on the market yourself. The housing association retains the right to ‘first refusal’ on your property for 21 years after you purchase your home outright.

This means they can buy the property back from you first for the market value before you sell it to someone else.

If you only own a share of your property the housing association will find a buyer for the property, such as another shared ownership buyer.

How to apply for shared ownership?

Firstly you need to speak to the Housing Team in your local council of go direct to the housing associations offering shared ownership. If you live in London you can register with First Steps website, the official intermediate housing programme from the Mayor of London or Share to Buy website.

All the housing associations have properties of new build homes and homes through their resale programmes. There are many new build properties and these are all promoted a year or so before the building is complete.

You can find out which schemes you are eligible for as some require you to be living in the same county or borough as the property. This will give you access to a wide range of properties to view.

You don’t need to live in a council owned home to be eligible.

Next you will need to ensure you can afford a mortgage, however, not all lenders offer loans for shared ownership. Lenders also conduct rigorous affordability checks based on your income and outgoings.

In addition to the mortgage you need to have a deposit and have other savings to cover the cost of buying a property such as solicitor fees, arrangement and valuation fees, stamp duty, and the cost of furnishing and decorating your new home.

There are also ongoing costs to be aware of even though you only own a share of your property. You are responsible for the council tax, maintenance costs for your flat and the housing association will apply a service charge, usually from £120 to £180 per month. This covers the costs of running the building such as cleaning, security, lighting and lift services.