Are you Mortgage ready?

There is a lot to think about when you go through the process of buying a home before you actually apply for a mortgage. These could include making sure you know the amount of deposit you will need, an understanding of the amount you need to borrow or researching your chosen area.

But when you eventually apply for a mortgage, the lender’s decision on how much you can afford to borrow can seem like a mysterious one. However often there’s no magic or secret behind the outcome, just a simple affordability formula.

Applying for a mortgage is a significant financial commitment, and being well-prepared can make the process smoother and increase your chances of approval. Here’s a comprehensive guide to help you get ready.

Understand What Mortgage Lenders Look For

Mortgage lenders assess several factors to determine your eligibility, these include: • Income and Employment: Lenders prefer stable and regular income. They will look at your employment history and current job status. • Credit History: A good credit score is crucial. Lenders will review your credit report to check your repayment history and outstanding debts. • Affordability: Lenders will assess your ability to afford the mortgage repayments, considering your income, expenses, and other financial commitments. • Deposit: The size of your deposit can affect the mortgage deals available to you. A larger deposit often means better terms.

Prove Your Financial Stability

In order to secure a mortgage, you’ll be required to prove your financial stability. This isn’t just about showing your mortgage lender that you can afford to pay back what you borrow, but to verify you are who you say you are! To prove your financial stability, you’ll need to provide: • Proof of Income: This includes payslips, bank statements, and tax returns if you’re self-employed. • Proof of Identity: Valid ID such as a passport or driving license. • Proof of Address: Utility bills or council tax statements. • Bank Statements: Usually from the last three to six months to show your spending habits and savings.

Check and Improve Your Credit Score

Your credit score plays a vital role in the mortgage application process, and mortgage providers will always check your credit score with a credit reference agency (CRA) before agreeing to lend you money. There are a number of companies that can provide details regarding your credit score, and you can use dedicated credit score websites to find out what your specific credit score currently is. Three of the largest CRA’s in the UK are: 1. www.experian.co.uk 2. www.equifax.co.uk 3. www.transunion.co.uk Your credit score will reflect any financial issues you have encountered in the last six years, such as loan defaults, county court judgements, individual voluntary arrangements or bankruptcy. These issues could affect whether a mortgage provider will lend to you, how much they will lend you and the interest rate available to you. Here’s how to improve it: • Check Your Credit Report: Obtain your credit report from Experian, Equifax, or TransUnion. • Correct Errors: Dispute any inaccuracies on your report. • Pay Bills on Time: Ensure all your bills are paid promptly. • Reduce Debt: Pay down existing debts to improve your debt-to-income ratio.

Assess Your Ongoing Affordability

Use mortgage calculators to estimate how much you can borrow and what your monthly repayments might be. Consider all ongoing costs, including: • Mortgage Repayments: Principal and interest payments. • Insurance: Home insurance and possibly mortgage protection insurance. • Maintenance: Regular upkeep of the property. • Utilities and Council Tax: Monthly bills and taxes. It’s likely your mortgage lender will look at how interest rates are predicted to change over a minimum of the next 5 years, to see how they might affect your mortgage payments.

If your payments are likely to go up, they will check that you could still afford them if your other outgoings and your income stayed the same. It is possible that rates could go up by more than predicted. If this happens, your payments could be higher than predicted too.

When considering taking out a mortgage, there are additional costs that you need to take into account, such as does stamp duty apply to the house you are buying (stamp duty is a tax paid when you buy property or land over a certain value in England, Wales and Northern Ireland, it is called the Land and Buildings Transaction Tax in Scotland) and legal costs, as well as the actual costs of running a household for the first time. These could be things such as budgeting for your monthly bills, which could include all sorts of costs such as energy bills, a television licence, broadband connection, telephone or council tax, as well as any ongoing repairs or maintenance costs you may incur.

Make sure you have a really clear picture of what these ongoing costs are, and always have a contingency plan to protect yourself against unforeseen increases in the cost of living.

Save for a Deposit

The deposit is a crucial part of your mortgage application. Typically, you’ll need at least 5-20% of the property’s value. Typically, the larger your deposit, the better the mortgage rates you may have access to.

Understand the Different Types of Mortgages

There are various types of mortgages available, and it can be confusing trying to work out which one is right for you. It is advisable to seek advice from a qualified and regulated financial professional before securing a mortgage to ensure that your individual circumstances are reflected in the product you take.

I. Repayment mortgages - sometimes called capital & interest mortgages, allow you to borrow enough to buy a property (minus your deposit) and then repay that total amount, with interest, over time. There are different types of repayment options available to you and understanding each of them and which is right for you is important. II. Fixed rate mortgages - a fixed-rate mortgage will keep your monthly repayments at a set rate for an agreed number of years. III. Tracker mortgages – these mortgages track the Bank of England base rate, which means that the amount of interest you pay each month could go up or down if the base rate does. If interest rates rise, this means your mortgage payment will also increase, so you should make sure you can afford higher repayments. IV. Discounted variable-rate mortgages - a discounted, variable-rate mortgage usually lasts for between two and five years and is fixed at a set percentage below your lender’s standard variable rate (SVR). However, if the SVR changes, your mortgage rate will change too. V. Off-set mortgages - with an offset mortgage you can use a linked savings account to offset against the amount you owe on your mortgage. So instead of earning interest on your savings it means you pay less interest on your mortgage. This is because your savings balance is used to offset the amount you owe in mortgage debt – and you only pay interest on the debt balance.

First-Time Buyer Schemes

There are schemes designed to help first timers get into the property market. One of the most recent is the First Homes Scheme (this is only available in England). If you are a first-time buyer, you may be able buy a home for 30% to 50% less than its market value. The home can be:

• A new home built by a developer • A home you buy from someone else who originally bought it as part of the scheme

There are certain eligibility criteria for the scheme, and you can read more about these on the gov.uk website (First Homes scheme: first-time buyer's guide: Overview - GOV.UK_)

Shared ownership is another option for first time buyers. Co-owning with a housing association means you can buy a part of the property and pay rent on the remaining amount. You can buy anything from 10% up to 75% depending on the developer.

Additional shares in the home can be bought in 1% instalments with heavily reduced fees. It will also include a ten-year period for owners where the landlord agrees to cover the cost of any repairs and maintenance to the property.

Get a Mortgage in Principle

A Mortgage in Principle (MIP) is a statement from a lender indicating how much they might lend you based on your financial situation. It’s not a guarantee but can help you understand your budget and show sellers you’re serious.

Conclusion

Preparing for a mortgage application involves understanding what lenders look for, proving your financial stability, improving your credit score, assessing affordability, saving for a deposit, exploring mortgage types, and considering first-time buyer schemes. By taking these steps, you can increase your chances of securing a mortgage and moving into your new home with confidence.

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Please note: This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The content was accurate at the time of writing, changes in circumstances, regulation and legislation after the time of publication may impact on the accuracy of the article.

If you do not keep up repayments on your mortgage your home may be at risk.

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