With house prices increasing faster than wages in recent years, you may be struggling to buy the home you want. Whether you’re looking to take your first step on the property ladder, buying somewhere bigger, or branching out on your own following a separation, applying for a mortgage can be daunting.
Therefore, we’ve looked at some of the options for gaining a mortgage to fund your dream home, as well as the risks and pitfalls of borrowing more.
Joint mortgage
Your income will play a key role in deciding whether you meet a mortgage lender’s affordability criteria. Combining your income with someone else by taking out a joint mortgage could potentially enable you to borrow more than you could on your own. This may be your spouse or partner but could just as easily be a friend or family member.
You’ll also be able to split other costs like stamp duty and legal fees. And once you move in, you’ll have someone to split the maintenance costs and monthly bills with too.
It may not all be plain sailing though. You’ll need to make sure you’re on the same page when it comes to upkeep and renovations. For example, if one of you has a desire to paint the bathroom bright pink but the other doesn’t, you could have a problem.
Some of the key areas to consider when taking on a joint mortgage are covered below. These are particularly important if you’re considering buying with a friend.
Things to agree before deciding to go ahead
• How much will each person contribute? This includes the amount for the deposit as well as the monthly mortgage payments and bills.
• What will happen if one of you gets a pay rise? Will you retain your arrangement, or expect them to start paying more?
• What will happen in the future should one person wish to sell and the other doesn’t? What if one of you meets a partner and wants to buy a house with them? Circumstances change, so it’s a good idea to have a plan in place upfront.
Implications of taking on a joint mortgage
• All borrowers are legal owners of the property.
• All borrowers are liable for the mortgage. Missed or late payments will impact all borrowers’ credit scores.
• If one of you gets in financial difficulty, creditors may make a claim against the property to settle the debt. In the worst-case scenario, you may be forced to sell the property.
• If the person you’re buying a house with already owns a property, you might be liable to pay a higher rate of stamp duty. Or, if you’re a first time buyer, you may not be eligible for any stamp duty reduction.
• You may find your ability to leave your share of the property to anyone other than the co-owner in your Will is limited.
Lenders will have different criteria about who they will let take out a mortgage together, so it’s worth checking this when shopping around.
It’s also a good idea to consider taking legal advice before proceeding with a joint mortgage. You may want to consider becoming tenants in common, or set up a formal agreement to protect your investment and agree what will happen when you sell the property.
While a joint mortgage can open doors, being aware of the pitfalls will make sure you go in with your eyes wide open.
Joint Borrower Sole Proprietor mortgage
Joint Borrower Sole Proprietor (JBSP) mortgages allow multiple people to take joint responsibility for the repayment of a mortgage. However, they won’t all be named on the title deeds as legal owners.
Who can take out a JBSP mortgage?
• Different lenders approach JBSP mortgages in different ways. Some allow two people to apply, with one being listed as the owner. Others are more flexible. For example, at Suffolk Building Society up to four people from two households may take out a mortgage. Also, up to two people can be named on the title deeds.
• JBSP mortgages can be a great way for family members to help each other out. As with a joint mortgage, multiple incomes will be considered when deciding how much you can borrow. This can be especially useful for first time buyers, but could equally apply to someone helping their parents.
Implications of taking on a JBSP mortgage
It’s important to recognise that there are risks with this type of mortgage.
• Missed or late payments could impact all borrowers’ credit scores. This may be relevant if anyone’s financial situation changes during the term of the mortgage.
• Being named on the mortgage will also impact the non-owning borrowers should they wish to move home, remortgage, or take other finance themselves.
• Non-owning borrowers won’t benefit from any increase in the property’s value. However, this can make deciding when to sell easier, as they won’t be concerned about maximizing the sale price when it’s time to move on.
• Significant stamp duty savings can be made with JBSP. Check out our companion blog for full details.
• As with joint mortgages, a breakdown in relationships can cause issues. Removing a joint borrower from a JBSP mortgage can be challenging. The owner/s may have to apply for a new mortgage and may not be able to borrow enough to retain the property, due to the lower level of income involved.
As with all mortgages, it’s essential to understand the implications of what you’re signing up for. And having a clear exit strategy should ideally be a key part of this process.
Gifted deposit
A gifted deposit is a sum of money given to you to pay for all or part of a deposit on a property. So, whether you’re looking to move up the ladder, moving on after a separation, or buying your first home, a gifted deposit can help you start the purchase process.
While a gifted deposit won’t help you to achieve a bigger mortgage, it can help you buy your dream home by topping up the total amount of funds you have available. It can also unlock lower rates if used to reduce your borrowing to achieve a lower loan to value ratio.
Gifted deposits generally come from an immediate relative, such as parents, grandparents or siblings. They may also come from a partner, or in less common circumstances, a more distant family member or a friend. Different lenders have different criteria though, so make sure you check the terms before you apply.
Most lenders won’t accept a gifted deposit if it’s from the seller of the property. This may sound unlikely but could happen if someone decides to sell a property to one of their children. For example, if you own a buy to let property and decide to exit the rental market.
Additionally, gifted deposits only qualify if there is no expectation the money will be repaid. Lenders also often require documentation to prove this. This is usually in the form of a gifted deposit letter, to confirm the funds are a genuine gift and not a loan.
It’s also important to note that typically the deposit giver has no stake in the property.
Affordability
When calculating affordability lenders will use an income multiple as part of their assessment of how much you may be able to borrow. This will vary between lenders and scenarios and can range from 4.5x your income to 6x your income. Taking this into account when you’re shopping around could help you achieve the biggest mortgage possible.
To ensure the mortgage is comfortable and affordable, your lender will complete an affordability assessment as well. This will be based on your income, expenditure, and the amount of disposable income you have available towards the mortgage payments. So, you may not always be able to borrow the maximum multiple available, if your lender thinks it might not be affordable.
Income types
When we talk about our income, most of us probably think of our salary first. Or in a similar vein, our pension. After that, we might add in any benefits we receive.
All of these things may be considered by lenders when they decide whether to approve your mortgage application. It’s therefore worth thinking carefully about how each form of income can help support your case.
• Employed income
Many of us have an income from employment. This might be a regular monthly salary or based on the number of hours or shifts we work in a specific period. But there are other elements that could help top this up. You may do regular paid overtime, or earn commission or bonuses that boost your base wage. You may get additional pay for working in a certain place or at certain times. Or you may take home a share or your teams’ tips or gratuities.
Either way, those additional elements could help your application. Lenders typically look at how consistent and predictable they are though. They may ask for contracts, pay slips, bank statements, employer references or tax returns, sometimes over an extended period. They’ll then be able to verify what your average income looks like. This will give them a better idea of your financial position and decide what to factor in when they agree how much you can borrow.
Different lenders have different criteria though and some are more flexible than others. You may find some cap the amount of variable income they consider. Others may require a minimum level of fixed income. So, shop around for the best deal.
• Self employed income
If you’re self employed it’s likely that your income won’t be as stable as someone on an annual salary. Lenders will still want you to demonstrate that you have a reliable income though. This can include providing tax returns for the last two or three years, your full business accounts for the same period, bank statements and proof of ongoing or future contracts. It’s worth considering this when you submit your tax return, as your level of declared income can affect the amount you’re eligible to borrow.
• Other income
In addition to your main job, you may receive income from a second job or freelance work. You may have investments that generate a regular return, or a property that you rent out. Or you may already be drawing a pension alongside your job. For these to be factored into affordability, lenders will look for the same evidence that they do for additions to your wage.
If you can provide documentation that illustrates regular, stable income over time, your other income may help your cause. Just don’t expect a lender to consider things that you can’t prove, or that are likely to be a one off.
• Benefits
You may also receive any number of government benefits. But did you know that some of them can be considered as part of your income? As a result, they can count towards your mortgage affordability.
These may include:
• Child Benefit
• Carer’s Allowance
• Disability Living Allowance (DLA)
• Personal Independence Payment (PIP)
• Incapacity Benefit (IB)
• Industrial Injuries Benefit (IIB)
• Attendance Allowance
• Pension Credit
• Universal Credit
• Widow’s Pension.
Some lenders may also consider:
• Housing Benefit
• Working Tax Credit
• Child Tax Credit
• Income Support
• Jobseeker’s Allowance (JSA)
• Employment and Support Allowance (ESA).
Each lender will have their own view on which benefits they accept though. The amount considered can vary between lenders too. As with other forms of income, they’ll also ask for documentation to verify the payments. It’s therefore crucial to check which benefits are eligible with your chosen provider.
If in doubt, consult the experts
As ever, speaking to an independent mortgage broker before you commit to anything can be useful. Whether you proceed via a broker or direct with your chosen lender, your adviser will be able to provide guidance on the right deal for you. This will help you avoid mistakes and give you added peace of mind.
Make sure you research all the options to help you secure the mortgage you need. This may be by applying for a joint mortgage, or a Joint Borrower Sole Proprietor (JBSP) mortgage. You may also be lucky enough to benefit from a gifted deposit.
Finally, don’t forget to think about all the potential sources of income that could support your application. If you’re unsure what counts, run it past your adviser and they’ll let you know if it’s worth including.
Once you factor in all these elements, you’ll be in the best position to apply for the mortgage you want, without overextending yourself. You may even be pleasantly surprised by the outcome.
Why not get started today by completing our decision in principle form? It only takes around 10 minutes and will give you an idea of how much you could borrow.
