If your income is below the national average (which currently sits at around £31,772 per year), then buying a house and taking on a mortgage which may run for the next 25 years or more, may feel like a pretty daunting financial commitment. Having a low income can make getting a mortgage large enough to buy a reasonable property a challenge. But it certainly isn’t impossible and it doesn’t have to be scary!
The level of your annual income is one of the most important factors in your mortgage application. It’s a major driver for a lender in their assessment of the mortgage they might be comfortable in offering to you. Lenders will look at your income because this is ultimately what will be used to repay what you’ve borrowed and meet your monthly mortgage repayments.
If I have a low income, will I struggle to get a mortgage?
If you have a low income it doesn’t necessarily mean you’ll struggle to find a lender who’ll offer you an affordable mortgage. By using an experienced mortgage broker or adviser you will have the best chance of finding the right mortgage for you.
How will a lender assess my mortgage application?
Firstly, let’s explain a little about how lenders generally assess mortgage applications. Whilst it’s true that most lenders will assess each mortgage application on a case-by-case basis, most of them will also have a set of basic lending criteria that they will apply as an initial assessment of a borrower’s affordability and suitability. This often includes an income multiplier. This helps to determine the maximum level of lending that they are willing to advance to an applicant.
Alongside your income, a lender will also want to look at your outgoings. This includes things like bills, food and travel costs. Lenders may also want to try to ‘futureproof’ your application. They do this by considering how you’d manage if interest rates were to rise or if you were to have a change in personal circumstances, such as starting a family for instance. Would you still be able to meet the monthly mortgage repayments?
In addition to the above, mortgage lenders will also consider:
- The size of your cash deposit
- Any savings you may have available as a safety net
- Your credit history
- The type and condition of the property you wish to purchase
Don’t feel discouraged by the lack of size of your income when looking for a mortgage. There are a number of options available to those on a low income which might help you secure the property you are after. Let’s look at a few of those options now.
Apply for a joint mortgage
Arguably, the easiest way to get a higher mortgage offer when you are on a low income is to apply for a joint mortgage with somebody else. This could be a partner, friend or a family member. Remember, however, that buying a house and taking out a mortgage is a legal contract and a long-term commitment. Consider very carefully who you enter into a joint mortgage with.
A joint mortgage allows you to borrow money jointly with another person. This means you not only share living costs, making the mortgage more affordable, but it means that there are two incomes coming into the household from a mortgage assessment point of view. This means that you will be able to borrow more. When you purchase a property with someone else, you will be joint owners with a legal claim to the ownership of the property. You will also both be liable for the entire mortgage and its monthly repayments.
With a joint mortgage application, lenders will take into consideration both applicants’ incomes in their income multiplier. So, let’s say that you both earn £18,000. The level of mortgage will be based on a joint income of £36,000. Using a 4.5x income multiplier, this could generate a mortgage up to £162,000. Combining incomes not only helps make the cost of owning a house more affordable and therefore helps you get accepted, but it could also secure you a much larger mortgage offer.
Find out more – ‘How do joint mortgages work?’
Put down a large deposit
Easier said than done, we know. If you are on a low income, how are you meant to put down a large deposit? Well, perhaps you have inherited enough money to be able to do this. Perhaps you are lucky enough to have some help from your parents. In fact, The Bank of Mum & Dad is up there amongst the most common ways that first-time buyers raise a house deposit.
Whilst it’s possible to use cash from a loan to put towards your deposit, our advice would be to use this option wisely. It’s important to be sure you’re able to afford the loan payments together with your mortgage repayments and other outgoings. You should also be mindful that the mortgage lender will take the loan into account when considering your affordability for the mortgage.
Maybe combining your savings with someone else and applying for a joint mortgage will help achieve the strongest application.
Your deposit will form a percentage of the purchase price of the property that you are buying. You will then need a mortgage to cover the remainder of the purchase price.
Let us explain; if the property you want to buy is £180,000 and you put down a deposit of £18,000, your deposit will be 10% of the property value, meaning you’ll need a mortgage for the 90% which would be £162,000.
Ultimately, a larger deposit should bring your mortgage borrowing and therefore your monthly repayments down. A deposit of between 10-20% is considered a good-sized deposit. 20%+ is considered to be a large deposit and will unlock better mortgage deals with lower interest rates.
Improve your credit score
Alongside your income details, your personal credit score is another major factor that lenders will take into consideration when assessing your mortgage application. It could influence the type and size of any deals they may offer you. Looking into your credit history is one of the ways in which a lender will gain information on how reliable you have been at paying back loans and borrowing in the past.
If you have borrowed money in the past and kept up with repayments, then you’re likely to have a good credit history. Having ‘good’ credit is a sign that a creditor can trust you. This will generally work in your favour. On the other hand, ‘bad’ credit could signal a history of missing or late repayments. This will serve as a warning to potential lenders. Bad credit coupled with a low income is likely to make it much more difficult to get accepted for the mortgage you want.
It’s good practice to find out your credit score ahead of applying for a mortgage. That way, you’ll have a good picture of how a lender is likely to view you as a potential customer. Find out more on the Experian website.
If you have never borrowed money previously and therefore do not have a credit history, then this can also present a challenge. It gives lenders nothing to go on. Therefore, they can’t be sure whether you are a responsible borrower or not. As a consequence, they are likely to take a cautious approach to your application.
Prior to applying for a mortgage, it’s a good idea to build up some level of good credit history. Perhaps take out a credit card with a small limit and use it fairly regularly. Ensure that you keep on top of repayments and ideally repay the balance in full each month. This will demonstrate that you are financially responsible and will help to build a positive credit score or improve a previously poor credit score.
Find out more – ‘How does bad credit affect a mortgage?’
Use a mortgage guarantor
If you know someone who is willing to be a mortgage guarantor for you, then this could be a helping hand in getting a mortgage on a low income. A mortgage guarantor is usually a parent or close family member who takes on some of the mortgage risk by acting as a safety net for your borrowing.
A mortgage guarantor must meet the eligibility criteria of the lender. They must also have sufficient disposable income available to cover your monthly mortgage commitment and/or have cash savings or equity in property available to offer as security in case you default.
Essentially, a mortgage guarantor may provide comfort to a lender. If you are unable to make the mortgage repayments, there is someone else that they can rely on to make these for you. Just be aware that not all lenders accept guarantor mortgages. And of course, being a mortgage guarantor is no small matter. It’s a big commitment and a legal tie.
Find out more – ‘What is a mortgage guarantor?’
Use a government scheme
It’s no secret that getting on the property ladder can be difficult – especially for those on a low income. The good news is that there is help out there for those who would like to utilise it. The government run a number of schemes that make purchasing a home that little bit easier.
Help to Buy
Let’s first talk about Help to Buy. Exclusive to first-time buyers, when using this scheme you are given an equity loan from the government to put towards the cost of a new build home (up to 20% of the property price). As a result, you will only need to provide a 5% cash deposit, which means lower upfront costs. There is no interest to pay on your equity loan for the first five years and you are likely to qualify for a wider range of mortgage deals with cheaper rates as your mortgage borrowing is likely to be sub 80% of the property value and therefore less of a risk to the lender.
It’s important to note that you will be limited by the price cap in your region. This means that you can only use the scheme to purchase a home costing no more than the specified property price cap in your region. This is in place to ensure that the scheme reaches the people who need it most. You can view the property price caps in your region here. This scheme will end in December so submissions will only be accepted up to the end of October.
The shared ownership scheme is the most popular of the government schemes designed to help people get on the property ladder. When you utilise the shared ownership scheme, you purchase a share of a property. The remaining proportion is retained by a Housing Association which then charges you monthly rent. It’s essentially a cross between buying and renting.
By purchasing a share of a property (typically between 30-50%), your deposit and your mortgage borrowing (and therefore repayments) will be much smaller than if you had purchased 100% of the property. Additionally, the rent you’ll be charged is typically less than the rate charged on the traditional rental market. It’s important to note that because you won’t own 100% of the property, you may encounter a few restrictions when it comes to some home improvements. Essentially, you are a tenant when you live in a shared ownership property. This could mean that in the very worst of cases, you might even be evicted if you fail to pay the rent, for instance.
Over time, you can follow the process of ‘staircasing’. This allows you to purchase further shares in the property and, eventually perhaps, reach 100% ownership. If you reach 100% ownership, you will no longer pay rent to the Housing Association.
Staircasing can be an expensive process, however. This is because you will need to get your house valued each time you do it. This incurs a valuation fee. You will have some legal expenses to pay as you’ll need to involve a solicitor. You may also incur some mortgage fees each time you rearrange your mortgage.
Mortgage Guarantee Scheme
A fairly new government-backed scheme, the Mortgage Guarantee Scheme is also known as the 5% mortgage scheme. It allows first-time buyers, home movers and previous homeowners to get a 95% loan-to-value mortgage. This means that you will only need to put down a 5% deposit on a property.
Ordinarily, the majority of lenders require a minimum of 10% for a house deposit. With the Covid-19 pandemic and the cost of living making raising deposits much harder for people all around the country, this scheme has been temporarily introduced to offer the opportunity to purchase a property with a much smaller deposit. This scheme is running until December 31st 2022 and is only available amongst participating lenders.
Use a mortgage adviser and broker
Lastly, if you are looking to get a mortgage on a low income, we would strongly advise you to use a mortgage adviser and broker to help you navigate the mortgage market. At Mortgage Light, we’ve helped people with all kinds of different financial situations secure the mortgage that they need.
Using a mortgage adviser and broker also significantly decreases your chances of getting rejected by a lender. No one likes getting rejected, but having a mortgage application rejected could actually set you back in the long run.
This is because each mortgage application will leave a hard search on your credit report. Having multiple hard searches in a short space of time can be an indication that you are relying on credit, having financial issues or your application has been rejected by other lenders. This could well be a red flag for any mortgage lender that you apply to. It signals that you may be a high-risk applicant.
Rest assured it is possible to get a mortgage on a low income. However, it may require a little forethought and planning. It’s all about finding the most suitable lenders and making your application the most attractive it can be.
Of course, this can be tricky to do alone. The Mortgage Light team are on hand to help you when you are ready to start exploring this exciting next milestone in your life! Our advisers are just a phone call away with plenty of friendly advice to offer. Give us a call on 01908 597655 or contact us via our website.