Everything you need to know about Islamic mortgages

Islamic mortgages are a type of mortgage based on Islamic principles, and therefore has some unique conditions and a slightly different process.

Islamic mortgages have been growing in popularity in the past few years for people who want to be good to their bank account and religious beliefs. However, Islamic mortgages are not suitable for everyone. Read on to find out if Islamic loans are suitable for you.

Islamic mortgages will typically require a down payment of at least 20% of the purchase price. And lenders will carry out the same affordability checks as any other mortgage provider.

This initial down payment must come from an individual's savings, funds from family members or friends, profit from selling other assets such as stocks or bonds, gifts given by relatives living abroad, or business income.

What is an Islamic mortgage?

Islamic mortgages are a type of mortgage that is based on Islamic principles. Islamic mortgages follow Islamic law or Sharia. For example, Islamic principles state that money should only be used for productive purposes; therefore, Islamic loans cannot be spent on frivolous gambling or buying alcohol.

Islamic loans may not charge interest either but can charge higher administration costs. In general, a sharia mortgage will be more expensive than a traditional mortgage.

There are different types of Islamic mortgages that can help you to get on the property ladder while remaining compliant with your principles.

A key thing to note about Islamic banking is that risk is shared between the lender and the borrower. This is why an Islamic mortgage will typically require a higher deposit of at least 20% of the property value.

Instead of charging interest on the loan amount, the lender will work with you to complete payments over a fixed period. In addition, the lender will usually fully or part-own the house until you have completed your payments.

Ijara: With this type of mortgage, the bank purchases the property and then leases it to you for a fixed term. Once the term is over, ownership of the property is transferred to you.

Musharaka: This is a co-ownership agreement where you split the property with the bank. You pay mortgage payments and rent on the remaining property share. Over time, as your principal amount increases, your rental payments increase. At the end of the payment period, you own the whole property.

Murabaha: In this situation, the bank purchases the property on your behalf. They will then sell the property to you at a higher rate. For example, if a property is worth £150,000, the bank may sell it to you for £200,000. You make equal instalments over the lifetime of the mortgage.

Interesting facts about Islamic mortgages

Around 2,500-3,000 residential and buy-to-let mortgages are issued in the UK every year.
There are currently 6 HPP providers operating in the UK, with more expected to announce products in the next few years.

How common are Islamic mortgages?

There are only a small number of providers offering Islamic mortgages in the UK. However, it's worth noting that you don't have to follow the Muslim faith to take advantage of this mortgage type. This type of mortgage is available to anyone interested in it.

Every Muslim in the UK who requires a loan to purchase property will have a sharia-compliant mortgage. There are currently a limited number of lenders in the UK who offer Halal mortgages.

Halal simply means that it is permitted in sharia law. The opposite of this is Haram, which means it is not allowed. For example, a traditional mortgage that charges interest on the loan is not permitted under Sharia law.

You might also see Islamic mortgages referred to as an HPP or home purchase plan. These are increasing in popularity with individuals who are concerned about the ways banks invest their money.

If you have concerns about the ethics of a bank's investments, you likely won't want to pay them interest. By choosing an HPP instead, you can avoid the interest and instead pay administrative fees.

How does an Islamic mortgage work?

Islamic mortgages require a down payment of at least 20% of the purchase price or appraised value. This initial down payment must come from an individual's savings, funds from family members or friends, profit from selling other assets such as stocks or bonds, gifts given by relatives living abroad, or business income.

This sum must not be subject to interest to remain compliant, so it isn't possible to take out a traditional loan for your deposit. Of course, if you are not Muslim, then this doesn’t apply to you.

Depending on the type of mortgage you choose, you will have to pay mortgage payments and rental payments on the property or fixed rental payments.

With a traditional mortgage, the buyer is listed as the owner, but the bank is the one that really has rights to the property. The buyer agrees to make mortgage payments, and if they fail, the lender has the right to sell the property to recoup their investment. Once the mortgage payments are completed, ownership is passed from the bank to the homeowner.

With an Islamic mortgage, you share the risk and benefits with the bank. This means that you might rent your home from the bank for the duration of your repayment period. If you cannot keep up with your payments, the bank may offer a grace period to allow you to bring your account back into good standing.

Another key benefit of an Islamic mortgage, or a home purchase plan, is that there are no fees for early repayment. So if your circumstances change and you can pay off your mortgage earlier, you won’t have to pay a penalty for this.

With a traditional lender, they will miss out on interest if you finish repayments early. To cover this shortfall, they will charge a fee if you pay off your mortgage early.

Who can access an Islamic mortgage?

Islamic mortgages are not suitable for everyone, but they are accessible to everyone. Since the lender does not charge interest on the mortgage, they have to make up the difference elsewhere.

This typically means more expensive arrangement fees, and a larger deposit is required. In addition, you will also be subject to other standard costs such as stamp duty, conveyancing fees and surveyor fees.

You do not have to be a Muslim to access an Islamic mortgage. Anyone can access this type of lending by approaching a lender that offers home purchase plans.

This type of lending is ideal if you are looking for a more ethical way to purchase a home. Since you don’t pay interest, you can be assured that the bank cannot use your money for unethical investments.

Sharia law prohibits lenders from investing in organisations involved with alcohol, tobacco, gambling or pornography. If you have strong beliefs about these sectors, an Islamic mortgage could be right for you.

There are currently a few lenders in the UK offering this type of mortgage. These are:

Al Rayan Bank
Gatehouse
Al Ahli
Heylo Housing

A few lenders are also expected to offer HPP within the next few years:

Strideup
Wayhome
Primary Finance
UBL
Habib Bank

Not all of these banks will advertise their products as Islamic mortgages. Some simply refer to them as home purchase plans. This demonstrates how this type of mortgage could soon have much wider appeal than just the Muslim community.

What are the requirements for an Islamic mortgage?

Lenders offering Islamic mortgages may be accepting a higher level of risk than with a traditional mortgage. This means that affordability checks will be just as important for this type of lending. Your credit score, deposit and income will all play a role in determining if you are suitable for this type of lending.

Islamic mortgage deposits

Since the lender does not charge interest, the lender must make money from the product in other ways. This can be through higher arrangement fees or by selling the property for more than the original purchase price.

Another key difference for an Islamic mortgage is the higher deposit required. Since the lender and borrower are sharing the risk, the required deposit may be much higher than an interest-charging mortgage. While a traditional interest-charging mortgage may be possible with a deposit as low as 5%, an Islamic mortgage will require a deposit closer to 20%.

Some Islamic lenders will allow you to secure a mortgage with a smaller deposit, but the increased arrangement fees for this type of lending might make it more expensive in the long term.

Credit score and history

Your credit rating will also play a role in whether or not you are accepted for an Islamic mortgage. Lenders want to know that you are responsible with money and capable of meeting your monthly commitments.

Lenders will look at your credit score and history of borrowing to determine if you are likely to keep up with your payments. Very poor credit history might make it more difficult to find a suitable lender, but again, every lender is different. If you have a stable income and a healthy deposit, you might find it easier to find a lender willing to overlook your credit history.

Employment history

Lenders will typically want to see that you have a fixed and steady source of income. For the self-employed, this can mean you need to disclose three years of accounts. For the newly self-employed, this can be a serious hurdle. However, working with the right lender may help you to overcome these issues.

If you have been employed by a company for less than 6-months, lenders may consider you to still be within your probationary period. This can also be an obstacle to securing a mortgage. However, lenders may be more inclined to accept your application once you have been in your role for more than six months.

LTV and affordability

The final factor to consider is the amount you want to borrow and the monthly repayments. No lender will consider lending to someone who would be financially stretched by their mortgage repayments.

Most Islamic mortgage providers will offer up to 4 times your annual salary. This could be extended to 4.5 times your annual salary in some cases. Your deposit would then need to make up the remainder of the property value.

If you have a smaller deposit, you will need to borrow more money. Even if this is within your salary multiple, a lender will still turn down the application if the monthly repayments would be too high. In this instance, you may need to wait a little longer and save a bigger deposit.

Are Islamic mortgages regulated?

Yes, all lenders are regulated by the Financial Conduct Authority (FCA), so you will have the same protection as with any other lender.

The process of purchasing a property will be the same as any other type of mortgage. You will need to pay for conveyancing, stamp duty, insurance and other fees. For the term of your payment plan, the lender will be the legal owner of the property. However, you will still be liable for buildings insurance.

Where can I find an Islamic mortgage broker?

To start your search for the right Sharia lender, we recommend working with our whole-of-market brokers. We can help you to understand your position and approach the lender most likely to accept your application.

If you are looking for a home purchase plan or want to understand your options, we recommend contacting our team today. We can help connect you with a broker to demystify the process and get you the answers you need.

What is a party wall agreement?

If you’re thinking about extending your property in any way, you need to know about party wall agreements. If you decide you want to stay in your property and extend rather than move house, you might be thinking about an extension, new layout or conversion. If you need to bring the builders in, you might need a party wall agreement.

The Party Wall etc Act 1996 was brought in to limit disputes between neighbours. It ensures that no changes can take place on a property without informing the neighbours. Neighbours cannot object without good reason, but it does mean that you will need to keep your neighbours' interests in mind when planning any building work.

When do I need a Party Wall Agreement?

Before any building work can take place, you will need to create a Party Wall Agreement, or Party Wall Award, with your immediate neighbours. This applies to any situation where you have an adjoining property. This includes shared walls between terraced and semi-detached properties, walls between flats and even garden walls.

A Party Wall Agreement, or Party Wall Award, is required for things like loft conversions, digging foundations for extensions, cavity wall insulation and even changes to a shared garden wall. A Party Wall Award protects both homeowners from disputes.

What is included in a Party Wall Agreement?

The Party Wall Agreement needs to include the following information:

Outline of the work planned and how it will progress
A schedule of checks to ensure work doesn’t damage their neighbouring property
Drawings of the planned work
Addresses of both properties
Planned working hours when the work will be completed
Details of the surveyor used
The neighbour’s surveyor fees
Details of the contractor’s public liability insurance
A time limit for the work to start

What if we don’t have a Party Wall Agreement?

You need to serve a Party Wall Agreement before moving forward with building works. The standard notice includes a form for your neighbours to sign if they are happy with the proposals.

If your neighbours agree, you can move forward with building works but you will need to observe the guidelines you set out in your proposal. So if you’ve stated that work will begin at 8 am and finish at 3 pm, you can’t have the builders arriving at 6 am with loud equipment.

If your neighbour does not respond or objects to the plans, then you will need to secure a Party Wall Award. You will need to instruct a surveyor to draw up the Party Wall Award. This can be more costly, so it is beneficial to get your neighbours on board with your plans before serving notice.

If there is no Party Wall Agreement, advice is often to speak to your neighbours and include them in your planning. They will feel more reassured that the plans will not damage their property or reduce their enjoyment. This is often easier than securing a Party Wall Award, as you will be liable for the surveyor fees and you won’t be able to move forward without this permission.

How to find tradesman for your home improvement projects

After months spent at home, many of us are thinking about tackling those long-overdue home improvement projects. For anything that can’t be handled with a DIY attitude, you’ll need to hire a tradesperson to help bring your ideas to life. There are some jobs that are always best left to the professionals to help protect your home and avoid damage.

Finding the right tradesman for your home improvement project can be difficult but essential. You need to know that you’re hiring someone who won’t damage your home, overcharge you, or leave you with a mess. Read on to discover our tips for choosing the right tradesman.

Ask family and friends

A recommendation can save you time and money in the long term. Ask friends, family and neighbours if they can recommend anyone trustworthy and skilled. You don’t have to go with the first person who is recommended, so always follow your instincts. Always make sure there is a good alignment of skills for your requirements and don’t compromise just because the person is highly recommended.

Ask around for quotes

You don’t have to choose the first person you find, feel free to ask around for quotes. This will help to give you an idea of the scale of the project and the financial requirements. You might have a budget in mind when you try to find tradesmen, but this could change drastically once you start to receive quotes. If a tradesperson is pushing you to agree to the project before they offer a quote, you can consider this to be a red flag.

Look at review websites

Anything you read on a review website should always be taken with a grain of salt. When people have a positive experience, they are less likely to leave a review than when someone has a negative experience. This means that tradespeople might have a lot of negative reviews, even if they are very skilled and experienced.

If they do have negative reviews, look at how they respond to these reviews. It’s often easy to tell if the reviewer is simply disgruntled and looking to lash out and damage their business.

There are plenty of review sites out there that can help you make a final decision. These include:

Look for clues about their business

Unscrupulous traders may dissolve their company and reform once they accrue too many bad reviews. Look for clues that this might be happening by checking Companies House for signs that they have been trading for a long time.

You will be able to see a list of directors and then see what other companies they may be involved with. If they have been declared bankrupt or have dissolved lots of similar companies in the past, this could be a sign they are trying to hide something.

If the person is self-employed, they might not be registered with Companies House. At the very least, they should then provide details of their insurance policy to ensure you are protected in the event something goes wrong.

When will 5% mortgages be back? How they work.

Many young people dream of getting on the property ladder. But with many mortgage companies asking for a minimum 10% deposit, and the price of houses spiralling out of control, this will remain nothing more than a dream for most.

Across the UK, the average deposit required to purchase a home is between £10,000 and £20,000. Unless you have rich parents willing to help you out, or you’ve managed to land a lucrative job from a young age and start saving, even this might be out of your reach.

In an effort to help more young people onto the property ladder, the government has announced a new mortgage guarantee scheme. This means that prospective homeowners could purchase a property with a small deposit of just 5%.

While this might sound like good news for those hoping to get on the property ladder, it’s important to consider the bigger picture. These mortgages certainly don’t come cheap, and might not be ideal for every borrower.

What is the 95% LTV mortgage scheme?

LTV means loan to value, and it shows how much loan is required as a percentage of the property value. A 95% LTV mortgage means that the borrower offers a deposit worth 5% of the value of the house. The mortgage provider offers the remaining 95%. Borrowing a higher amount can mean a longer repayment term, more interest and higher monthly repayments.

As a borrower, the mortgage scheme operates just like any other mortgage. There is no difference between 95% LTV mortgages under the government scheme and any other 95% LTV service.

The primary difference is in the way the lenders make their decision. With the government backed scheme, the government agrees to shoulder some of the cost if the borrower is unable to pay back the mortgage. This makes it possible for lenders to relax their lending criteria.

When will the 95% LTV mortgage scheme start?

This scheme opened on April 19th 2021 and will run until December 2022. This scheme is similar to one that operated between 2013 and 2017. This was called the 5% Help To Buy Government-backed mortgage scheme.

Not all lenders are signed up to the scheme, but if they do sign up, they have to agree to offer a 5-year fixed price mortgage as part of their selection of 95% LTV mortgage products. Fewer and fewer mortgage providers have offered mortgages with low deposits since the Coronavirus pandemic.

The introduction of this scheme is welcome news for those who have been unable to purchase a home as a result of strict lending criteria, spiralling house prices and an insecure job market.

Who can benefit from this scheme?

Not everyone is eligible for the scheme, so before you get your hopes up, consider the following. First and foremost, this scheme is not limited to first-time buyers. This is great news for anyone thinking about moving house and wanting to free up some equity.

The criteria for the 5% deposit mortgage scheme is as follows:

You have to be buying your main residential home. These mortgages cannot be used for second homes, holiday homes or buy to let properties.
The property cannot be worth more than £600,000. If you have your sights set on a high-value property, you’ll have to raise a bigger deposit.
The property cannot be a new-build. What qualifies as a new build will vary by lender, but they will typically be rejected for a 95% LTV mortgage. This is because new build properties often struggle to retain their value, so a mortgage provider could lose out if the borrower were to default on their mortgage payments. Since the government is offering a guarantee on the mortgage, they set the terms.
Your deposit must be between 5% and 9% of the property value. This means you are borrowing 95% to 91% of the property value.
You will need to pass the lender’s affordability checks. These will vary by lender and can cover everything from income to credit score.

Are 95% LTV mortgages a good thing?

While a government-backed mortgage sounds tempting, there is nothing special about this type of mortgage. The lenders might be hyping them up, but this isn’t for the borrower’s benefit. And while several major players might be taking part in the scheme, this might not be the best option for you.

If you are truly struggling to get on the property ladder, this can be used as a last resort, but prospective homeowners with a little more flexibility should widen their scope.

The only reason this type of mortgage has been introduced is to encourage lenders to start offering a lending product they had started to phase out. At the moment, the following lenders are signed up to the scheme:

Lloyds
Halifax
Bank of Scotland
Natwest
Santander
Barclays
HSBC

Remember that many of these were already offering 5% deposit mortgages before the pandemic, and the government-backed scheme is no different to their other products.

The government-backed mortgages are better for the lender, as they offer additional security. But they offer no additional benefits to the borrower. When shopping around for mortgages, remember that this scheme might not offer any additional benefits. You could be better off with a different mortgage type or saving a little longer to offer a bigger deposit.

An alternative to the 5% deposit mortgage

If you have a small deposit, a better option could be the Help To Buy Equity Loan. This will allow prospective borrowers with a 5% deposit to borrow up to 20% of the value of the property from the government.

This is an interest-free loan for the first five years and will enable buyers to increase their deposit amount from 5% up to 25%. However, these loans can only be used on new-build homes.

Experts are warning this scheme is expensive

Affordability should be your primary concern when securing a mortgage, and this type of mortgage might not offer the best value. If you are determined to get on the property ladder with a smaller deposit, be prepared for much higher rates and a more expensive mortgage in the long term.

The following table demonstrates how a bigger deposit will secure a cheaper mortgage, based on a £150,000 property.

	95% LTV	90% LTV	60% LTV
2 year fixed	3.69% + £594 fee Fees: £9,054	2.99% + £1007 fee Fees: £8,196	1.13% + £1001 fee Fees: £4,621
5 year fixed	3.45% + £35 fee Fees: £8,537	3.37% + £1,024 fee Fees: £8,220	1.28% + £1025 fee Fees: £4,354
2 year tracker	3.99% + £35 fee Fees: £9,034	3.59% + £999 fee Fees: £9,054	1.39% + £1016 fee Fees: £4,772

As you can see, a higher LTV will secure you a much better rate, which will reduce your expenditure and the lifetime costs of the mortgage. If you are able to stay put and keep saving, you could secure a much better deal.

How can I apply for a 95% LTV mortgage?

If you are still keen to go ahead with this mortgage type, you will need to apply as you would for any other mortgage. You can choose to go directly to a lender or work with a broker to shop around for the best possible deal.

If you are hoping to make this process as cheap as possible, working with a broker could help you to save money on your application. They will be able to help present you in the best possible light and minimise your risk of rejection.

While a broker does add additional fees, they also help to save you money in the long term by connecting you with the best possible lender. The lender they suggest might not be offering the government-backed scheme, but remember that the scheme offers no additional benefits to you.

Apply for a 90% LTV mortgage if you can

If you’re on the border with a 9% deposit, you might be better off waiting until you have saved a 10% deposit as this will open up far more lending opportunities.

If you aren’t already, using a Lifetime ISA account could help you to boost your savings. You can save up to £4000 per year and receive a government cash bonus of 25%. So after a year, you’d have an additional £1000 added to your savings.

LISA savings accounts can be used for retirement or purchasing a home, so you would be able to access the money without a penalty. You must be aged between 18 and 39 when you open your LISA account.

What happens if you default on a 95% LTV mortgage?

If you are unable to keep up with the payments on your mortgage, there is no additional help from the government. A government-backed loan does not benefit the borrower, rather, the lender enjoys some financial protection.

The government guarantees 95% of any losses above 80% LTV. So on a £200,000 property with a 95% mortgage, the lender would not guarantee losses on the first £160,000. They would guarantee 95% of the remaining £40,000.

If you miss your mortgage payments, your home could be repossessed and sold by the lender. They would look to recoup their original investment and any associated costs of selling your home. Since lenders typically sell repossessed properties below market value, you would likely lose your deposit.

This is why it is important to ensure your mortgage repayments are affordable now, but also if your circumstances were to change. Stress-test your finances to see what would happen if you or your partner were to lose their job.

The 95% LTV mortgage application

Although the government is backing this scheme and offering some protection to lenders, they are still required to carry out affordability checks to ensure you will be able to make repayments on time every month.

There are several stages to the mortgage application. Borrowers will typically apply for a mortgage in principle, which allows them to begin searching for a house with confidence. They can also put in an offer with a mortgage in principle, and then complete the application process once their offer has been accepted.

Lenders will want to see the following information as part of their affordability checks:

Proof of employment and income
Credit history
Bank statements for the past 3 months
Your deposit amount

Remember that all mortgage applications are simply an assessment of affordability and risk. Once a lender has determined you can afford the mortgage, they then decide how risky it would be to lend to you.

With a larger deposit, you are borrowing less money and shouldering more of the risk. So if you default on your mortgage payments, the lender has a better chance of recouping their investment.

With a 95% LTV mortgage, you expose the lender to greater risk, which means they will charge a higher interest rate. Prospective homeowners who are able to save more money or set their sights on a cheaper property might be better off in the long term by choosing a 90% LTV mortgage over a 95% LTV mortgage.

Rejection is still a possibility

The government guarantee does not extend to borrowers. This means that, although the risk is reduced for lenders, they still have an obligation to make sure they are lending responsibly. Rejection is possible, particularly if you have a small deposit, poor credit score and frequently run into financial problems, you might struggle to get accepted.

If you are rejected, we’ve provided a few recommendations to help get you back on track at the end of this article.

How to increase your chances of being accepted

If you are determined to go ahead with a 95% LTV mortgage, there are steps you can take to make your application look better to lenders. The following steps could help you to secure a better rate on your mortgage, or at the very least, reduce your chances of being rejected for a mortgage.

Improve your credit score

A higher credit score and spotless credit history will help to reassure lenders that you are responsible with money. If you have no credit history, this can reflect just as poorly as bad credit history. Try taking out a credit card with a low credit limit and using it little and often. Make sure you pay it off in full every month. You can also apply to have your rental payments included in your credit score.

Keep your spending under control

Lenders like to see that your expenses are what you say they are. So if you tell them in your application that you only spend £100 a month on takeaways, then you shouldn’t have £400 in UberEats charges every month. Keep your spending in check and make sure it matches your stated expenses. Make sure you end every month with a surplus in your account.

Get your deposit from savings

It’s common for parents to want to help their children onto the property ladder, but try to save your deposit if you can. This shows good financial responsibility and a monthly surplus in income. If you have to take your deposit from a family member, it isn’t the end of the world, but you could improve your position by adding this to your own savings.

Avoid end of the month transfers

When it reaches the end of the month, those who struggle to manage their money might ask for short-term loans from friends and family. Try to avoid this where possible. Mortgage underwriters will look at small loans from friends and family as a sign that you struggle to budget throughout the month. They might also interpret it as a sign that you are struggling to make your salary stretch to the end of the month.

Steer clear of betting websites

Betting is another kind of financial behaviour that lenders don’t like to see. The occasional flutter is fine, as long as you aren’t losing large amounts. But substantial or frequent transfers to betting websites can damage your chances of being accepted.

End each month with money leftover

Lenders want to see that you have a surplus of money by the end of the month. This shows that you have enough income, are in control of your finances, and can handle any unexpected blows. Working with a broker can help as they will tell you how many months of bank statements each lender will ask to see. This can help you to plan and make sure your finances are in order.

Pay down your debts

To boost your credit score, try to keep your credit usage under 40% of the total amount. Once credit cards are paid off in full and no longer required, consider closing them as this will give mortgage providers some reassurance that you won’t rack up additional debts.

Avoid large purchase

A common problem that mortgage brokers face is that borrowers have flawless finances when they complete their mortgage in principle application, but then things change when they complete the full application. It’s not uncommon for borrowers to purchase large items like cars on credit, which can drastically alter your credit score. Even if you have the funds for large purchases, wait until after your application has been accepted.

Steps to take if you are rejected

While the 95% mortgage might offer some guarantees for the lender, they are still required to make sure the mortgage is affordable. If the mortgage would put a big strain on your finances, your application could be rejected.

If your application is rejected, follow these steps to get back on track. You might lose out on a home you really like, but remember that new homes go on the market all the time, so there could be an even better home out there.

You should ideally wait a few months before submitting another application. This is because the application will show up on your credit report and this is a red flag to lenders.
Address the problems in your original application. For example, if your actual spending doesn’t match up to your budgeted spending in your application, this needs to be addressed.
Save more money. If you have to wait a few extra months, don’t be tempted to dip into your savings. Instead, focus on saving as much as possible. This could help to bump you up to the 90% LTV level, which will allow you access to more lending products.
Speak to a mortgage broker. Sometimes the reason for your application being rejected is nothing to do with your personal finances. Sometimes it’s an admin error or missing information. Work with a mortgage broker to ensure your application is in order and check if there are any areas that could be improved.
Stay positive. Being rejected for a mortgage application isn’t the end of the world. It might feel crushing at the time, but try to keep things in perspective. Waiting a little longer to get on the property ladder could allow you to save more money, access better lending products, and save money on your mortgage in the long term.

5% mortgage deposit summary

To sum up the points in this article:

The 5% mortgages guaranteed by the government offers protection to lenders, not borrowers.
If a borrower defaults on their mortgage, the government will cover any loss experienced by the lender.
You will need a deposit between 5% and 9% of the property value.
This type of mortgage is more expensive than other mortgage types.
A government-backed mortgage is no different to any other kind of 5% mortgage.
It is still possible to be rejected for a government-backed mortgage.
The same application rules apply, and you will need to pay close attention to your finances.
Saving a little extra money could give you access to a 90% LTV mortgage, which will offer much better rates.

Negotiating Guide: How to get a home seller to lower their price

When you’ve found your dream home, it can be difficult to accept if it is out of your price range. Or perhaps you’ve looked around the suspect that it might be a little overpriced. When there are things that need to be fixed in the property, you might be wondering if you can get the seller to knock a little bit off the asking price.

This is a fairly common tactic in the property market. But negotiating on the price of a property is delicate ground and needs to be approached with caution. Move in too aggressively, and you could annoy the seller and make them less inclined to accept your offer. But remember, most sellers will put their home on the market for a little more than they are hoping to acheive. This leaves some room for negotiations.

In this guide, we will look at some of the most popular ways to ask the seller to lower the price. We’ll explore how to establish the groundwork and what you need to do to close the sale. We’ll also look at how you can rescue a sale that has gone south due to poor negotiating. If you’re buying a home and want to secure a great deal, consider this essential reading!

Do your research

The first step to securing a better price is to do your research. You need to find out everything you can about the home, the seller and the circumstances of the sale. When you’re armed with all of the information, you can approach the seller with the right attitude and proposal.

Inspect the interior of the house thoroughly and identify any areas that will need to be fixed or renovated. If everything is in order, get picky. Have similarly priced houses in the area offering more living space? A landscaped garden? If this is the priciest home in the surrounding area, you could state your case that the price could be lower.

Look at the sale history

How long has the home been on the market, and has it been listed previously? This can give you clues about the mindset of the seller. If the home has been on the market for a while, it could be that they have priced it too high because they aren’t in a real rush to sell. When the right buyer comes along, they assume that they’ll be willing to pay the full asking price.

Keep your cool

If the seller and the agent know that you are utterly smitten with a property, they’ll know that you are willing to part with more money to secure it. Keep your emotions in check and don’t give anything away.

Take the time to point out the flaws in the property so that they both know you are taking your search seriously. When we act from an emotional position, we’re more likely to overlook things like an ageing boiler or uneven flooring. By showing that you’re actively looking for the flaws of the property, you can show the seller that you’re not letting your emotions cloud your judgement.

Remember the agent doesn’t work for you

The agent showing you the home doesn’t work for you so they might not have your best interests at heart. They might have multiple people looking at the property and more viewings lined up. So when you float the idea of a lower offer, they might use delay tactics to get more viewings arranged.

By law, the agent has to let the seller know about every offer made on the home, no matter how low it may be. To be sure that your offers get through, always follow up in writing and ask the agent to confirm receipt. If you are worried about managing the negotiating process, you can appoint a buyer’s agent to act on your behalf.

Preparing to make an offer

When you’ve settled on a number, it’s time to kick off the negotiations. Let the selling agent know that you would like to put in an offer and then follow this up in writing. They will let the seller know where you would like to start the negotiations.

If the seller isn’t interested in negotiating the price, they will reject your offer. Repeat increases in your offer will simply let the seller know that you were always willing to pay the asking price. If another buyer comes along in the meantime, you could lose the property to a counter offer.

If the seller is interested, then the negotiations can begin. Think about the ways you can sweeten the deal to make the sales process easier. If you’re in no rush to move, this can take the pressure off the seller while they find another home. But some sellers appreciate a speedy transaction and sale so they can move on.

What will make a low bid more likely to be successful?

If the seller is in a hurry to move, they might be more willing to negotiate on the price.
If the home has been on the market for a long time, this could mean that the seller is getting tired of waiting and wants to get things moving.
Sellers know that there are some things that buyers want to see in a home, such as a new boiler. If they don’t want to invest any more money in a property, they might be willing to negotiate on price to avoid having to make any changes.
If you’re the only person who has expressed an interest in the property, and the seller is looking for a quick sale, they might offer some room for negotiation on the price.
If your funding is ready to go, the seller might be more inclined to offer some wiggle room on the price.
If you are not in a chain, this can reassure sellers that you won’t back out further down the line.
If the seller has instructed multiple agents, the agent you are dealing with might encourage them to accept the lower price to secure the commission.
Likewise, if the agent is keen for a quick sale with minimum effort so they can collect their commission, they might encourage the seller to accept your price.

Bidding tactics for success

How you bid on the property will depend largely on the bidding process. It will either be an open bidding process or a sealed bidding process.

An open bidding process takes place between the buyer, agent and seller. The buyer instructs the agent to tell the seller how much they are willing to pay. When multiple people are bidding, it is down to the agent to pass these across, but they might only share the highest bid.

With open bidding, you have a chance to sell yourself. The seller might feel better knowing that their home is going to a young family, for example. If another bid is higher than yours, the agent will typically let you know so that you can decide if you want to increase your bid.

In a sealed bidding structure, the buyer writes down their bid and seals it in an envelope. The agent then delivers all bids to the seller without seeing them. The seller will then typically select the highest bid. This method is popular in high demand areas.

With sealed bidding, you have to be careful not to go over your budget. You can still submit a low bid, but if the area is in high demand and lots of other people are bidding at the same time, you’re unlikely to be successful. In a sealed bid, always add a little extra to a round number, so if someone submits the same bid, yours will be a little higher. For example, instead of bidding £195,000 try bidding £195,050.

When your bid is accepted

Buying a property with a low bidding strategy leaves you at risk of something known as “gazumping”. This is when another buyer comes along later in the process and offers a higher price. This can cost you hundreds of pounds if you have already started the process of surveying the property.

Once a seller has accepted your bid, ask them to take it off the market. The majority will do this anyway, but if they are reluctant to do so, ask why they are still marketing the property. There is a chance they will allow the sale to go through, but only if a better deal doesn’t come along in the meantime. There isn’t much you can do about this, other than be prepared to outbid anyone who comes along at a later date.

A note on holding deposits

In some volatile housing markets such as London, buyers might ask you to hand over something known as a holding deposit. This is a sum of money that shows the seller you are serious about your bid. Some will be refundable if the seller pulls out of the sale, but others are not.

Agents will typically discourage buyers from asking for a holding deposit as it can delay the process. If the seller is insistent, make sure it is refundable if the seller pulls out and that it is paid into an escrow account rather than directly to the seller. This will prevent you from losing money unnecessarily.

Getting a mortgage in the UK as a refugee

In this article, we will look at everything you need to know about getting a mortgage as a refugee. We will look in particular at those with refugee status and not asylum seekers. However, as many of these steps require years of preparation, this could be considered as a future guide for those with asylum seeker status.

According to the United Nations, around 124,000 refugees are living in the UK. While not the most generous country, the UK is also not the least generous. Those who make it through the complex system and secure the right to live in the UK may soon discover that the second hurdle is homeownership. The steps required to secure a mortgage as a refugee are by no means simple.

As a specialist mortgage broker, we have experience working with individuals from all walks of life. Before we explore the process of securing a mortgage, it’s worth considering how mortgages work in the UK. The UK mortgage differs from many places throughout Europe and around the world.

Around 65.5% of the UK population owns their own home. This is lower than in many European countries, despite having a mortgage application system that makes it easier for individuals to purchase a home. Throughout Europe and the rest of the world, it is far more common for lenders to ask for a deposit of at least 25% of the property value. In the UK, lenders are more willing to offer a high LTV, with a deposit as small as 5 or 10% available in some cases.

While this might be an advantage for those with citizenship, this type of mortgage is rarely extended to those in the UK on a visa. Most applications from those on a visa will require a 25% deposit. This may be waived if the individual is applying as part of a joint mortgage application with another person who has full residency in the UK.

To determine how much an individual can borrow, lenders will look at something called an income multiple. This usually means around four to five times your annual income. If you have a daily rate rather than an annual salary, this will be calculated as 5 times your daily rate multiplied by 46 weeks, to allow for holiday leave.

As a refugee, you will need to have been in the UK for 12 months before being permitted to work. And when applying for a mortgage, many lenders will want to see at least 6 months of employment history. This could be as high as 12 months in some cases.

This means that you typically need to have been living in the UK for 18 to 24 months before a mortgage is possible. If you are self-employed, this time could be even longer as you might need two-years of accounts.

Another thing to consider when thinking about applying for a mortgage as a refugee is the availability of documents. You will need to provide evidence of the source of your mortgage funds to satisfy international money laundering checks. By working with a company like Niche Mortgage Info, we can provide advice and support on the mortgage process for refugees. We can advise on the visa mortgage market and how best to navigate the checks and procedures.

If you already have a mortgage on a UK property, remortgaging will follow the same process. The pool of lenders available to you will be smaller, so it’s important to speak to a specialist mortgage advisor to ensure you don’t pay more than you need to for your lending products. If you are thinking about purchasing a buy-to-let property, be aware that this is only open to refugees that already own an existing UK property.

More lenders move to 5.5 income rule as standard criteria

Excellent news for mortgage applicants as yet another bank offers 5.5 income through mortgage brokers.

From the 11th of October, Barclays for Intermediaries will now offer mortgages of 5.5 times annual income for a select number of clients. This includes:

Mortgages taken out on a repayment basis
Single applicants earning over £75,000 per year
Joint applicants earning over £100,000 per year
Applicants with a 15% deposit or more

In the past, this enhanced income multiple was only available to customers of Barclays Premier. This move will make larger mortgages available for more applicants.

Barclays issued a word of warning to applicants, noting that additional affordability checks will be required. The lower of the two figures will be taken, so this is not a guarantee of a 5.5 times income multiple. These affordability checks factor in things like dependents and existing outgoings.

Barclays joins a growing list of mortgage providers willing to extend beyond five times annual income for their lending. Niche Mortgage Info helps to connect interested borrowers with lenders most likely to accept their application. We can help you to maximise your mortgage borrowing and secure an excellent rate on your application.

First Time Buyers Mortgage Guide Post Covid

First Time Buyers Buying a home is a huge investment, perhaps the biggest one you will ever make. This is why it is important that you understand the process and the external factors that will impact your application. Securing a mortgage for the first time can be daunting. And with so many new terms to learn, you might quickly feel out of your depth. Minimum deposits, interest rates, legal structures and repayment terms can leave you feeling like you need to go back to school.

Securing the right mortgage for your needs is no longer about looking for the lowest rate of interest. In many cases, finding a mortgage that you are most likely to be accepted for is the way forward. As banks tighten their lending criteria, the task of getting a mortgage is about much more than just finding a great deal. By educating yourself on the process of securing a mortgage, you will be in a much better position to secure a great deal, even in a post-Covid world.

Saving for a deposit

The days of 100% mortgages are long gone. Lenders are no longer willing or able to take this risk, so if you’re hoping to get on the property ladder, it’s time to start thinking about deposits. Saving a healthy-sized deposit can help to secure a better interest rate. It will also reduce the amount you pay back in the long term, so it’s worth offering as much as you can afford.

In an ideal world, you would save a deposit that is equal to 20% of the value of the property. This will give you access to the best lending rates and increase your chances of being accepted. If you are unable to save this much, don’t worry, there are ways around this. You could make use of the Government’s Help To Buy scheme, which only requires a 5% deposit. Or you could look into shared equity homeownership.

Sprucing up your credit score

Lenders not only want to see that you have been able to save a sizable deposit. They also want to see that you are generally responsible with your money. To do this, they use credit scores and credit history files to assess your history and experience with money. If you have a history of poor financial management, this could lead to your application being rejected, or subject to a higher interest rate.

Not everyone is well versed in credit history and reporting, but you’ll need to get familiar before you submit your mortgage application. There are three main credit checking agencies in the UK; Experian, Equifax and TransUnion. These companies collect information about your credit cards, bank accounts and other credit facilities such as utility accounts. They also collect information about missed payments, CCJs and bankruptcies.

If you always make your payments on time and keep your credit utilisation under 50% of your limit, you should have no trouble passing this stage of the application. However, if you have a few blemishes on your record, you might want to spend a few months cleaning up your report. At the very minimum, registering to vote at your current address will ensure that the bank can confirm your identity without extensive checks. You can check your score here.

Proving your income

Lenders want to know that your mortgage is affordable at the moment and will be affordable in the future. This means you will need to provide proof of income. For some people, this is as simple as digging out your P60. Your employer should give you one of these at the end of every year. It outlines your income and any tax paid.

If you are self-employed, the process becomes slightly more complicated. Many lenders will ask to see three years of accounts, and some will want to see these prepared by an accountant. If you are unable to provide three years of accounts, the application process might be more difficult, but not impossible. You may have to approach specialist lenders that are more accustomed to working with the self-employed. The more information you can provide, the better.

Lenders may also ask to see the last three months of your bank statements. They are looking for signs of irresponsible spending, so try to keep this in check in the months running up to your application. Some things can raise an eyebrow for lenders, and some will rule you out entirely. Using betting websites is one category of spending that lenders typically don’t want to see on your bank statements.

Choosing your mortgage term

Once you have reached this stage in your application, it’s time to start thinking about mortgage terms. The term is how long you want to spend paying back the mortgage. The mortgage term is typically determined by how much you can afford to pay every month, but it can be helpful to push this to the upper limit to reduce the amount you pay back in total.

Lenders consider a short term mortgage to be under 20 years and a long-term mortgage to be over 30 years. The majority of first-time buyers will opt for a 25-year mortgage, but you can extend this or shorten is as required. While a shorter term will cost less in interest, your monthly payments will be much higher. Conversely, a long-term mortgage will cost a lot more in interest over the duration of the mortgage, but your monthly payments will be lower.

Consider the cost of a £200,000 home on a mortgage with a fixed interest rate of 3%. With a 25 year mortgage, your monthly payments would be £948 and the total amount repayable would be £284,526. But on a 15-year mortgage, your monthly payments would be £1,381 and the total amount repayable would be £249,148. This is a significant difference in the cost of the mortgage.

Understanding how your repayment terms will impact the cost of your mortgage in the long term is vital to securing a good deal. Looking for a deal that offers the lowest monthly repayments could save you a few hundred in your monthly repayments, but this could add up to tens of thousands in interest payments over the life of the mortgage.

Understanding mortgage rate structure

Perhaps the most difficult part of mortgages for first-time buyers to understand is the mortgage rate structure. This is the package that will tell you how much interest you will pay for the lifetime of your mortgage. This can be broken down into two types of mortgage; fixed and variable rate. To help you understand how each type will impact your repayments, we’ve broken them down in further detail below.

Fixed-rate mortgage

With a fixed-rate mortgage, the interest rate will be fixed for the lifetime of your plan. This will allow you to plan and budget, as you’ll always know what your monthly repayments will be. Interest rates in the country can increase or fall, and this will have no impact on your repayment plan.

This type of mortgage will typically be offered based on the Bank Of England base rate at the time of your application. But expect this rate to be higher than other mortgage rates. This is because banks are unable to predict the future and need to mitigate against the risk of a rise in interest rates. Likewise, if the Bank Of England decides to drop interest rates, you won’t be able to take advantage of this.

Variable-rate mortgage

In the case of a variable rate mortgage, your interest rate and your monthly repayments will vary depending on adjustments to the interest rates. In 2009, the Bank Of England base rate fell from 5% to 0.5% in just 12 months. Anyone on a variable rate mortgage during this time would have enjoyed a significant drop in their monthly repayments.

Likewise, if the interest rates increase, you could see your monthly repayments increase, too. So, there is the risk that you could end up paying more every month, but some people are happy with this risk as it means they could also end up paying less.

The interest rate isn’t always linked to the Bank Of England base rate. The lender sets the interest rate, so they can change it as they see fit. Interest rates will typically change depending on the economy. In a slow economy, lenders will typically lower interest rates to encourage people to spend their money instead of saving.

If you would like a mortgage that is linked to the Bank Of England base rate, this is called a tracker mortgage. This will increase or decrease depending on the Bank Of England base rate movements. The base rate is currently at 0.1%, but don’t get too excited. A tracker rate mortgage will be a specific percentage above the Bank Of England base rate. So if your rate was set at 1% above the base rate, your interest rate would now be 1.1%. But in October 2008, the Bank Of England base rate was 4.5%, so your interest rate would have been 5.5%.

The biggest benefit of this type of mortgage can be seen in times of low interest rates. During this time, you should be increasing your monthly payments and overpaying when possible. This will allow you to pay off the mortgage in a shorter term.

Look out for monthly introductory rates

When shopping around, keep your eyes peeled for introductory offers. A mortgage is a huge investment, and lenders want to get as many customers as possible. This is why they create compelling introductory offers to help land your business. This might include a low interest rate for a fixed amount of time, which switches to a variable rate after this period.

The fixed-rate could be a lengthy period, even up to 10 years, so this could be a great way to enjoy some financial security and fix your expenses for this period. If you can use this time to overpay your mortgage every month, you could remortgage your property once the fixed period has come to an end and be in a much better position.

Other expenses to consider

Buying your first home will come with quite a few unexpected expenses that could catch you off guard. According to Money Saving Expert, the additional costs of buying a home have increased by 300% in the past 10 years. Make sure you factor in the following expenses when purchasing your first home.

Arrangement fee

This is charged by your lender for setting up the mortgage. This might be a fixed amount or a percentage of the mortgage value. While some will ask for this payment upfront, others will allow you to add this to the cost of your mortgage. Remember that this means you will be paying interest on the fee, so it might be better to offer a smaller deposit and pay this off upfront.

Valuation fee

Before a lender will approve your mortgage, they need to check that the property is worth what you are planning to pay for it. This will protect them from loss if they have to repossess your home. The valuable part of the application process is paid to a third party valuable company to provide a bank-approved valuation.

Legal fees

Legal fees cover a number of different steps, and all of these can be referred to as ‘conveyancing’. This is a process that includes all of the legal checks, the handling of the deposit, and the legally transferring the property ownership into your name. Some lenders will cover the cost of conveyancing in their introductory offer, so this is a great way to save money for the move.

Post-covid mortgage recap

Applying for a mortgage post-covid is still a complicated process, but this could be an excellent time to get on the property ladder. If your job is secure and you’ve taken the opportunity to boost your savings, this could be the ideal time to secure an excellent rate on your mortgage and see what other perks the lender can offer. You’ll never know if you don’t ask, so always be inquisitive and informed throughout the process to make sure you’re getting the best deal available.

Has Lockdown Lifted Your Savings?

The lockdown has forced many of us to rethink how we live our lives. While some workers have been furloughed to help companies stay afloat, others are working from home, ditching their usual desk for the kitchen table.

One unexpected side effect of the lockdown for some people is that their financial situation is looking a lot stronger. This may be a blessing in months to come, as we don’t yet know the full impact the COVID-19 outbreak will have on the economy.

The lockdown created the perfect conditions for those trying to save. In particular, those who may have struggled to put away money every month because they were tempted by social plans may have been forced to curb their spending.

Reduced expenses

The biggest impact the lockdown will have had on personal finances is the change in monthly expenditure. With many offices closed, many people are working from home, which means they no longer have to pay for their daily commute. Some car insurance companies have also agreed to freeze insurance payments for those who do not need to use their cars during this time.

Banks have given borrowers the opportunity to pause their mortgage, loan and credit card payments, giving them some breathing room for the first time. Anyone stuck in their overdraft month after month may have been given respite from the usual monthly interest charges, giving them a chance to break the habit.

But the change to our way of life won’t have an entirely positive impact. People can expect to see their energy bills increase as we all spend more time at home. And those who didn’t previously have a home office setup may have been forced to foot the bill for upgrading their office tech.

Change of priorities

While spending on entertainment, travel and holidays has all but disappeared, other things may have become more expensive. Food shortages at the start of the pandemic may have forced you to choose a different supermarket for your weekly shop. You may also have had to opt for more expensive products.

The outcome?

The lockdown has had an unexpected impact on our finances. While some things may be more expensive, overall, the cost of living decreases when you can’t go shopping, go on holiday, or enjoy restaurants and cinemas. The result is that some people have become unexpected lockdown savers. While furlough wages may be lower than a full-time wage, some people have used the time away from work tasks to take on additional work and boost their income.

Research suggests that around 16% of people feel better off now than they did at the start of the pandemic. Hitting pause on the world economy, and allowing people to hit reset on their finances has allowed many to get back on track with their finances. After paying off credit card debt and clearing overdrafts, this has left many people with extra disposable income which they can then save.

Keep the habit going

Those feeling more financially buoyant as a result of the lockdown may be wondering how they can keep this going once things return to normal. If you’re saving for a deposit for a home, the lockdown may have given you a head start.

When things return to normal, it’s important that you don’t spend more every month to “make up for lost time”. Instead, get into the habit of putting away money in a savings account at the start of every month. This will allow you to budget with the remaining funds, rather than waiting to see what is left at the end of the month.

Mortgage Advantages and Disadvantages

Getting on the property ladder is a very common life goal. Despite this, not everyone really understands the role of a mortgage in purchasing a home. Taking on a mortgage is a big responsibility, and with it comes a range of advantages and disadvantages to consider.

If you’re thinking about purchasing a home with the help of a mortgage, make sure you have considered the following before taking the first steps. If you’re ready to start your journey to homeownership, working with Niche Mortgage Info can help you to access the best possible deals.

What is a mortgage?

Buying a home is a considerable investment, and most people don’t have this kind of money just lying around. This is where banks and building societies come in. A bank provides the capital upfront, under the agreement that you will pay back the loan, with interest, usually over a period of around 25-40 years.

Who can get a mortgage?

The decision to grant a borrower a mortgage is made by underwriters. They will assess the risk of lending to a person on a case-by-case basis. Each lender will have their own requirements to determine who is able to secure a mortgage. In general, lenders want to see that you have a steady and reliable income, good money management skills and no adverse credit history. That said, even those with trouble in the past can often find a lender willing to work with them.

Advantages of a mortgage

A mortgage makes homeownership possible. Not many people have £200,000 just lying around, so unless you have a trust fund or rich relatives, a mortgage might be your only option for homeownership. Owning your own home gives you the power to make changes to a property and really make it your own. You can invest in the property, adding an extension or improving the interior and this can add value to the property.
You can stop paying rent. One of the biggest perks of owning your own home is that you will no longer be trapped in a rental cycle. This means your monthly housing expenses will be going towards something that you own, rather than paying your landlord’s mortgage.
A mortgage is a kind of investment. A mortgage is an investment, and a home is an asset. While your monthly mortgage payments might seem similar to rental payments, you’re actually directing your income towards a kind of investment fund. This can be a viable retirement investment, particularly if your home increases in value and you are then able to sell it and downsize to a smaller property. If you sell a property before you have paid the mortgage in full, you will only get back your portion of the equity.

Disadvantages of a mortgage

You will pay back a lot more than you borrowed. This is a simple fact of mortgages. While you can shop around for a better deal and remortgage throughout the lifetime of your agreement, the simple fact is that you will pay back more than you borrowed. This is simply the price we agree to pay in order to be able to purchase a home. When choosing your mortgage product, make sure that you take into consideration all of the fees to make sure you’re getting a good deal.
Your mortgage payments could change. If you choose a variable mortgage product, your payments could be less predictable than rental payments would be. People choose this type of mortgage as there is a chance they could see their payments decrease. But it is just as likely that their payments could increase. If you want some security that your payments won’t change, you should explore the option of a fixed mortgage. This will typically be fixed for a number of years, so you will have more certainty with your finances.
You could end up with negative equity. If the value of your home drops dramatically, you could be in a situation where you owe more than the home is worth. This means that you will be unable to sell the home without still owing the lender more money. This is what happened across the United States during the 2008 financial crash. It resulted in some homeowners simply abandoning their homes rather than continuing to make payments.
You need a healthy deposit. Mortgages that cover 100% of the value of the property are a thing of the past. This means that you’ll need to be able to save money for a deposit. Saving up a large sum of money might seem impossible, but there are ways to make this easier. Using a help to buy scheme can allow you to supplement your deposit with a loan from the Government. This means you could buy a home with a 25% deposit despite only saving 5% of the deposit.