You’re a first time buyer, excited about owning your own place - it’s easy to get carried away and launch yourself into house hunting. But, if you need a mortgage to fund buying a house, you should arrange your finances first.
You should know certain things before applying for a mortgage, and it’s worth starting the preparation a few months in advance. This will help you be clear about what you can and can’t afford. If you have an agreement in principle (AIP) from a mortgage lender, you will be a better prospect for estate agents and vendors. Plus, it will help speed up the process once you find your dream home.
1. The bigger your deposit the better your interest rate
All lenders will require a deposit of at least 5%, but if you can put down a 20% or even a 25% deposit, you will get a much better interest rate.
Halifax is offering a 1.30% interest rate fixed for two years, but this requires a 25% deposit. With a 5% deposit, Barclays will offer 3.45% interest rate fixed for five years.
Use comparison websites, such as moneysupermarket.com
to shop around and find out the best rates available.
2. There are several different types of mortgages
There are various mortgage options out there to suit different life stages, needs and budgets.
Typically mortgages are repaid over 25 years. However, some lenders will offer 30-year mortgages. Longer mortgage terms can make it easier to pass the mortgage affordability tests as the monthly payments will be lower. Bear in mind that longer loan periods come with higher interest rates and mean you will end up paying more in total.
Interest Rate Types
- Fixed-Rate Mortgage – The interest rate stays the same for a set period, usually between 2 and 5 years, so you know exactly what your mortgage payments will be each month. At the end of the period, the interest rate reverts to the variable rate. At this point, you can take out a new deal, either with the same lender or a different one. You will face a penalty if you leave the deal before the period is up.
- Tracker Mortgage – The interest rate changes periodically in line with the Bank of England base rate, which means that your repayments will change over the term of the loan.
- Variable Rate Mortgage – This is similar to a tracker, but rather than being linked to the Bank of England base rate, the interest rate is linked to the lender's standard variable rate (SVR). Your mortgage interest rate could change even if there has been no change to the Bank of England base rate. What’s more, even if the base rate does fall, there is no guarantee your lender will adjust their SVR by the same amount.
Think about whether you need the security of a fixed rate or prefer a tracker or variable mortgage which may be cheaper long term.
3. A good credit rating is essential
Mortgage companies will using credit reports to check that you are a good long-term bet by finding out how responsible you’ve been with credit in the past. Checking your own credit rating first is a vital step and should be done well before the lenders start looking into your credit history.
The reports will list your credit cards, loans, overdrafts, mortgages, mobile phone and utility payments over the past six years.
There are three credit reference agencies in the UK; Experian, TransUnion and Equifax and you need to look at them all because you don’t know which one your lender will choose to use.
There used to be a charge for seeing your credit report, but the change in law regarding data protection (GDPR) in May 2018 means you can now view them for free.
Check whether everything in the reports is accurate - if it isn’t, contact the lender to have it put right. If this doesn’t work, you can contact the financial ombudsman.
If your credit score is low, you may need to put off applying for a few months while you improve it - see point 4!
4. Your finances must be in order
If you have debts or a history of missed payments, you should act now to put things right. You need to reduce your debt-to-income ratio - the proportion of debt that you have in relation to the money you have coming in. Lenders tend to prefer applicants with a lower ratio, who are more likely to meet their monthly payments.
Don’t make any new applications for credit in the six months before your application, and make sure you haven’t missed any payments or defaulted on any bills for at least a year.
This might mean tightening your belt and prioritising your homebuying project. Cutting unnecessary spending is also a good idea because lenders will be scrutinising your bank statements for anything that indicates that you aren’t responsible with money.
5. You’ll need a budget to pass affordability tests
Mortgage lenders will check that you can afford the monthly repayments, so it is not just what you earn that matters but how much you spend. Create a budget showing your monthly income and spend. Consider cutting back on unnecessary outgoings to help demonstrate that you can afford the mortgage repayments.
Remember to include the following costs in your budget:
- Mortgage repayments
- Buildings and contents insurance
- Utilities (gas, electric, water, internet, phone)
- Repair expenses
- Service charges (if you are buying a flat)
6. You’ll need to be ready for an ID check
As proof of identity, you’ll need your passport or a photo driving licence, make sure your passport is valid and your drivers licence has your current address. You'll also need two documents as proof of address; a bank statement, utility bill, council tax bill or credit card statement, dated within the last three months.
Check you’ll be able to get your hands on these documents – this could be difficult if you have a lot of direct debits and paperless bills. Also, check that all documents have the correct spelling of your name and address.
The electoral roll is a key tool used by mortgage lenders to check your identity, so not being registered could harm your application.
7. You’ll need to prove your income and outgoings
To prove your outgoings, you'll need bank and credit card statements for up to six months, plus details of any loans and other regular payments such as childcare or travel.
You may need your P60 and payslips for the past three months. If you're self-employed, you’ll need self-assessment records of tax returns for the past three years.
You will also need to show proof that you have the cash for your deposit. If someone is giving you the deposit, you’ll need a letter to prove it’s a gift, not a loan that they may want back in the future.
8. It doesn’t look good to have too much available credit
Assess all your credit cards and accounts, closing any that you haven’t used in a while. It doesn’t look good to have too much available credit. Don’t close them all though, you need to have some credit cards to be able to demonstrate that you can use them responsibly.
9. You’ll need money to pay for all the extras
It’s not just the deposit and the monthly mortgage payments; there are other costs you will need to cover too.
- Mortgage arrangement fee – Typically lenders charge an arrangement fee, usually £995, although this can be added to the mortgage.
- Solicitors fees – You will need a solicitor or licensed conveyancer to carry out the legal work of buying a new home. Expect to pay around £850 to £1,500.
- Survey fees – All lenders will insist on a mortgage valuation survey, the cost is based on the value and size of the property and is typically between £150 and £1,500. It is wise to also pay for a more comprehensive buildings survey before you exchange contracts.
- Stamp Duty – Until 31st March you won’t have to pay stamp duty on properties costing less than £500,000. For homes costing more than £500,000 you will have to pay stamp duty according to the bands the purchase price falls within. Read more about stamp duty in our blog.
Some mortgage lenders will offer free legal and survey fee deals or even cashback when you accept their mortgage deal.
10. You’re more likely to get a mortgage if you have a good savings record
If you can demonstrate a good savings record, even if it is just a small amount each month, mortgage lenders will likely look more favourably on you. This will also help towards saving for your deposit.
Apply for a mortgage in principle
When you are ready, you can apply for a mortgage in principle. This will give you a good idea of how much you can borrow, estate agents and sellers are more likely to accept offers from buyers who already have a decision from a lender in place. The mortgage offer is usually valid for 90 days.
Don’t be tempted to ask for too many AIP checks as they may appear on your credit file. Some lenders carry out a ‘soft’ search which won’t show up to other mortgage companies – so it’s worth checking about this first.
If your application is rejected, don’t make another application to a different lender immediately – it could affect your credit score. Go through your application and your credit report again to check that you haven’t missed anything. You can also contact the lender to ask why your application was rejected.
If you are a first time buyer, looking in central London, we can advise you about the steps you need to take and show you our range of properties. Contact us to find out more.