Can anyone help explain how on earth getting a mortgage works?

[VacuumCleaner]

Hi, I am really hoping someone is able to explain how getting a mortgage works in this situation - I have googled and am more confused than before.

Couple are late twenties, been together 3 years, engaged 1 year ago and due to marry next year (in case relevant). A and B are the members of the couple and are both first time buyers with good credit ratings.

Person A was gifted £25k about 10 years ago from an elderly relative - it remains in a trust fund. They have about £3k in easy access savings and earn £30k. Parents willing to gift another £10k towards deposit if needed.

Person B has no gifted deposit. Has about £6k in easy access savings. Earns £42k. Parents not in a position to gift any money. Has much higher earning potential in future than A.

So, could A and B buy a house (is £300k realistic to apply for based on salary deposit?) and with B effectively giving no deposit, but both be on the mortgage, or do they have to both contribute to deposit? Is it likely to get approved?

thanks in advance to anyone able to shed a bit of light on this as I don’t want to apply and risk a poor credit rating if it gets rejected.

I'd speak to a broker, L&C are really good from my experience - they'll be able to advise on how much you can borrow (they take salary and debts / financial commitments into account) and can let you know how likely you will to be accepted.

Depending on how you want to do it you can get a deed of trust or similar regarding the deposits (so you both get out what you paid in) if you want to protect the deposit. It doesn't matter who is providing the deposit out of A and B, they will just need to see proof of the funds. If any is gifted you'll need a letter from the people gifting to say it's a gift not a loan, but apart from that they don't check who saved the deposit if you're applying as a couple, you can both go on the mortgage.

Easiest thing is to see a mortgage broker to get an idea of how much they can borrow. Ours was recommended by the estate agents and has been brilliant. We did look at L&C then saw they use panel solicitors so decided to go to a local broker and choose our own solicitors. I worked at a law firm and have dealt with some horrors on the other side so I didn't want to risk it.

For the deposit, the mortgage lenders don't care who is paying it. They just want to know how much it is to calculate loan to value. A solicitor might suggest ring fencing the deposit. They did with my DH though he decided not to (he contributed the whole deposit from the sale of his own house).

How much is your full deposit bearing in mind you need some costs for moving? You say £25k in trust fund from 10 years ago but that must be larger now from interest over 10 years. Do you have any outgoings like loans, car payments or credit cards? With a combined salary of £72k you are likely to be able to borrow £324k with no debt, so would need a deposit of around £76k for a £300k property plus solicitors surveys and moving costs.

Sorry ignore me, I was thinking of £400k house! Yes with no outgoings you are likely to be able to get a £300k house with that!

Use the L&C mortgage calculator on their website. It checks what you’ll be able to borrow and tells you how much the mortgage repayments will be. It doesn’t affect your credit rating.

Thanks everyone for the really helpful advice already. I really appreciate it.

@Overthebow we don’t have any big outgoings like that - no loans, car was bought outright years ago and one joint credit card is paid off in full each month. Biggest outgoing is rent.

the £25k was less 10 years ago - it’s about that now sorry for confusion.

will look at legal advice with ring fencing deposit, although if couple are to marry would that be undone then anyway? Not sure how it works!

thanks again everyone

There are lots of mortgage calculators online where you can get a good idea of affordability.

The other thing you will be asked when assessed in person is about any fixed outgoings that you couldn't easily stop paying (eg. Nursery fees or similar).

The deposits you might want legal advice about whether they should be protected by a deed of trust as you are contributing unevenly. That's somewhat separate from the mortgage process however

First you get a decision in principle.

It’s a soft search and doesn’t affect credit rating. This says to you and bank how much they will likely be willing to lend on full application.

You can get multiple decision in principles. But wouldn’t go too mad. Maybe pick 3.

So a mortgage will look at joint finances. How you arrange them is between yourselves, as far as the mortgage company looks at it, you're both liable and if one doesn't pay the other will have to.

All cash can be put towards a deposit, but don't forget it also needs to pay for stamp duty and legal fees.

There are two amounts to consider, size of deposit, so that's the cash you can afford to put to a deposit after paying stamp and legal fees. And how much they will loan, which is based on income and expenditure, usually somewhere around 4 times total earnings.

Assuming a £300k house there would be no stamp duty. Legal fees, surveys etc would be approx £1250.

So you have about £40k available for deposit.

With your earnings you could borrow about £280k.

Most banks require a 10% deposit for a mortgage so you could put in £30k and borrow £270k, that would leave you some money for moving, rainy day, works to the house etc. Or put in more deposit and borrow less in mortgage. Or buy a slightly more expensive house if you expect to be able to earn more and keep up with mortgage payments, as long as you have the 10% deposit.

In terms of protecting the deposit that is nothing to do with the mortgage and something you decide between the two of you and get the solicitor to arrange. They will usually do this with a deed of trust which will say for example, upon the sale party A gets the first £30k, with the rest to be split 50:50. This will still be valid after marriage, but obviously will be taken in to account upon divorce if relevant as part of that party's capital.

Banks won't mind who have saved the deposit.
You'll be able to borrow up to 4.5x joint income assuming good credit history.
If you need to ring fence the deposit then he's not the guy you should be marrying.

When I arranged one a couple of years ago I used John Charcol (a broker) and they were pretty helpful. You need evidence of everything (savings, income, outgoings) so start collecting that up for both of you. Some financial institutions do faffy things like paper only statements (or you'll have lost the logins) so it can take a while.

You need a solicitor to do the conveyancing and they can also advise on things like protecting deposits in case you split up. Ask friends and family if they've used one and liked them.

If you have some idea of what you can afford and what percentage loan to value you'd be looking at (e.g. 20% deposit = 80% loan to value) you can progress from there. There are two main types of mortgage - interest only and repayment. The latter kind you gradually repay the lump sum you borrowed and the interest on it. The former kind you just pay interest. They come in fixed or variable rates. A fixed rate gives some certainty at least for a few years.

The key thing to remember is it may be financial but you are still buying a product/service, so shop around.

I don't agree with the previous poster about deposits. None of us has got a crystal ball. Plan for the worst, expect the best etc.

As a rough guide they lend 3 and a half times joint income

Depends on how easy a life you want.

I went with my bank as I'd been with them 20+ years so my paperwork was reduced by a LOT when we finalised the mortgage. Mightn't have been the best deal, but they were certainly the best judges of what I could/ couldn't afford and had a calculator on their website to show me what I could borrow. I went with that after a few viewings within my price range.

If you want to save money rather than paperwork, then yes, use a broker.

I've worked in several banks through the years and I cannot recommend using an independent mortgage broker enough.
They will absolutely help you, explain everything like mortgages, deposit, LTV ( loan to value) home insurance life insurance all that. Ask friends and family for recommendations on who they use best way to get someone in your area that is reputable.

Not too dissimilar earnings wise, we borrowed 300k and had a gifted deposit of 15k, 5% deposit as first time buyers. Deposit was from my parents, so no it doesn't have to be contributed from both sides. We used Strike as our mortgage brokers, who were good. We bought our first house this year

Thanks everyone I really appreciate the advice. In the new year we will begin the process I think!

If you buy as tenants in common, not joint tenants, you can protect your deposit by specifying what would happen in the event of a house sale.

Mortgage lenders don't care where/who the deposit comes from.

Get the person who is contributing mostly to the deposit to write up a contract stating that in the event of a relationship split that they get £X amount back that they contributed.

They won’t care who the
money is coming from as long as they have it, unless a high percentage of it is gifted (inheritance isn’t classed as gifted money). Make sure person A gets good legal advice about protecting their deposit in the event that they split. As it is now, they could buy the house, B cheats on A the week after, then leaves with half of A’s trust fund. Not saying that will happen, but that’s where they would be legally if nothing is arranged beforehand.

Get married first.
House prices will continue to fall which is to your benefit if you wait to buy a house until after you're married.

When we was applying or looking into a mortgage, we was told, we wouldn't be able to get one, until we had a credit card.
I have no idea why.
I joined experian to check my points and get advise.
I have talked to other people who had the same advice given and they ended up in debt because they had never used a credit card before and ended up going daft with it.
We got one that we knew we could afford and basically just kept having stuff within our price range every month, then paying it off at the end of the month.
We got our credit card a year before we was ready to purchase a house.
If you get a credit card and you dont use it. It gives you a negative affect.
After we purchased, we got rid of the credit card straight away.

As PP have said, you need to see an IFA who will look at the whole market and see what you can afford.

You can also own your house in the ratio that you put the deposit in so that you are both protected and both benefit from any increase in equity. This can also apply when you are married.

I just put your salaries in to the Halifax "How much can I borrow" calculator.

Always put the higher salary in first.

Assuming you have no other debts or credit card bills, it says you could borrow up to £332,215 over 25 years.

Together with a deposit of £31,000 this gives you £363,215 to spend BUT I would suggest ensuring your deposit money also includes enough for legal fees and stamp duty.

A mortgage of £332,215 over 25 years, based on current interest rates, works out at just over £2,000 per month.

Given your take home pay (before any pensions or student loans) must be around £4,700 between you, you'd have to consider if a £2,000 mortgage is too much (it feels it to me).

As PPs have said, make sure you speak with a solicitor about protecting your respective deposits and also consider the proportions that you'll pay each month each.

(now) DH and I were fortunate when we bought our house we were both able to contribute equally both in terms of the deposit and monthly repayments, but I appreciate it can be tricky to figure out when salaries aren't equal.