What Options Are There If My Income Isn’t Enough For the Mortgage I Require?
As we have pointed out in a previous blog post, it’s currently very difficult to save up a deposit. Most first time buyers require help from family in order to have enough deposit for their first purchase. This typically has to be 5% of the property purchase price as a minimum.
However, deposit is not the only thing that makes is difficult to get on to the property ladder. The other issue can be income. With property prices having increased at a pace faster than income, there are many areas of the UK where loan requirements are on average 7 or 8 times the average income. Most lenders will only look to offer roughly 4.5x your income, or in a few circumstances 5x, which clearly leaves a gap in affordability.
What options are there to bridge this gap?
The most obvious is to increase your deposit. Not only does that reduce the loan required, but it may also push the mortgage into a lower Loan to Value bracket, which will often have the added bonus effect of lower interest rates.
If this isn’t an option, for example if parents do not have disposable cash to gift to the first time buyer, then they may be able to help in a different way. With most parents having got onto the property ladder at a time where prices were more affordable, they have generally far lower payments, and in some cases have already paid off the mortgage in full. Parents have also usually made it further along the career ladder and with that comes higher salaries. Lower outoings and higher income equate to more disposable income on a monthly basis. If only that income could be used to help with affordability.
The good news is that it can be. If you add the parent to the mortgage then their income will be included in the affordability assessment. But there is a problem. If they already own a property then this would make the purchase subject to second home additional stamp duty. That would add 3% to the cost of the property in the form of tax.
The solution to this problem is the Joint Borrower Sole Proprietor mortgage. This means that the parent is on the mortgage but not on the deeds to the property (and therefore has no ownership rights). But their income is still used for affordability purposes.
This is a great solution as long as everyone knows what they are getting themselves into. Not all lenders offer this option, but those that do will require the Joint Borrower to take independent legal advice so that they know that they are equally liable for the payments and their credit file will be impacted if there are any late payments. This additional legal work will cost approximately £300. They also have to be aware that if they have their own mortgage that the second mortgage may affect affordability when the original mortgage comes up for renewal.
As you will have probably realized, this is a complex topic but is a good solution that is underused across the industry. Amram advisers have years of experience with this type of mortgage and can talk you through all the options in an impartial way.
If you think this type of mortgage suits your situation, or you are looking for any other form of finance, then please get in touch using the details at the bottom of the page.