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
Nearly 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. The higher your deposit, the greater your chances of better rates.
Mortgage rates are higher than they have been for many years, meaning your deposit amount really matters when it comes to reducing your costs. For example, the average interest rate for mortgages (at time of writing) is 5.80% for 2 year fixed-rate mortgage (with 75% LTV), and for a 5 year fixed-rate (75% LTV), you’ll generally get a slightly lower rate of 5.35%.
2. There are several different types of mortgages
There are various mortgage options out there to suit different life stages, needs and budgets.
Loan Terms
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 be 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.
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.
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 driver’s license 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.
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.
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 around £995, although this can be added to the mortgage.
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.
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.