First thing first: what is a mortgage?
A mortgage is a loan used to buy a property. But, it differs from other kinds of loan in three ways:
It’s typically has a longer term – traditionally, most mortgages run for 25years. However, the term can be shorter or longer depending on a number of factors, including the size of your deposit (more on this later).
More recently mortgage terms are increasing to 30, 35 and 40-year terms and these are becoming the norm, especially among first-time buyers. a longer term means smaller monthly repayments, which make your mortgage more affordable. the flip side is that, the longer the term, the more interest you’ll have to pay.
It’s secured against the value of the property you’ve purchased – Mortgages are secured against the value of the property. if you’re not able to keep up with your monthly repayments, your mortgage provider has the right to take away your property and sell it off.
Typically Mortgagees won’t allow you to borrow the full purchase price – The vast majority of mortgages don’t cover the full purchase price of your new home. you’ll need to pay a portion – the deposit – out of your own pocket which typically in the UK is £33k.
Most lenders will require at least 5% of the purchase price as a deposit. however, size really does matter. the larger your deposit, the better you can expect the terms of your mortgage to be.
What should I do before applying for a mortgage ? – The extent of your options when getting a mortgage depends on your credit history, you’re financial situation and the size of your deposit. Most mortgage lenders have a strict approval procedures, so it make sense to be sure your finances are in order before you start applying.
Advantages of a larger deposit – The larger the deposit, the less you have to borrow, which means smaller monthly repayments. Lenders carry out affordability checks before approving a mortgage. the less you need to borrow, the more likely you are to pass these checks and get approved without any problems. The less you borrow, the less risky you’ll look in a mortgage lenders eyes, which translates into a better interest rate.
Check your credit report – mortgage lenders use your credit history to determine how likely you are to default on your debt. Your credit history is recorded in your credit report (and your credit score is a quick way of seeing how your report might look to lenders).
If the information in your credit report suggests you’ve struggled to repay credit in the past, you may appear risky to lenders, so chances are you could be offered less favourable terms on your mortgage, or get turned down all together. on the flip side, a better credit history makes it likier that you’ll get accepted and get a good deal.
with all this in mind, your first step should be to check your credit score and report before applying for a mortgage. if your score is less than expected, you’ll have the chance to improve it before by making changes to your credit report.
Look at your spending – Mortgage lenders in the passed used to calculate how much you can borrow as a multiple of your annual salary. As a rule of thumb, you could borrow up to three times your annual salary or two and half times your annual salary in case of a joint mortgage application.
However, since the 2008 financial crisis, the rules have changed and has become much stricter. Lenders nowadays, determine how much you can borrow by making an affordability assessment. In other words, they won’t just look at your income, but also your expenses. they’ll also consider what might happen should your financial circumstances change in the future.
So, you need to prepare for this by gathering documentary evidence of your monthly expenses, including utility bills, other loans and even your grocery spend and mobile phone contract. try reducing your monthly spend as much as possible, for instance by switching energy providers or get rid of that sports car this costing a small fortune each month.
Save up for a deposit – you should try and save up as much as possible for a deposit before you start approaching lenders. The best deals typically require 25% deposit or more. if this sounds unrealistic, consider looking into government HELP TO BUY schemes or even Bunce (www.buncecrowd.com). Many banks also have saving plans to help you save up for a deposit.
Other costs when buying your mortgage – your deposit isn’t the only thing you need to keep in mind when saving up to buy a home. You’ll also need to budget for the following additional costs:
- Stamp Duty
- Survey fees
- Land Registry fees
- Mortgage Processing fees
- Legal fees
Shop around for a mortgage – Once you know your financial situation, its time to start speaking to lenders. You have four options:
- Talking to your bank
- using a mortgage broker
- Housing Agency (shared ownership)
- apply to bunce (www.buncecrowd.com)
Talking to your bank – You bank often feels like the obvious choice, because you already have a relationship. however, most banks offer exclusive deals and discounts on mortgages if you’re already a customer.
But while a loyalty discount might look advantageous on paper, you may be able to get a better deal elsewhere. keep in mind that mortgage lenders are in competition with one another. it pays to compare offers before you make a decision.
Using a mortgage broker – the advantage of using a broker is that they’ll shop around for you. a good mortgage broker will also explain your options and help you choose the best deal. for best results, use a mortgage broker who offers advise from the whole market, not just from select lenders. the broker should disclose this as well as their fee structure – upfront.
Housing Agency (Shared ownership) – This is relative new and is backed by the government but has strict criteria, plus you still need to apply for a mortgage. However, if you cannot afford a typical deposit for a home this may be advantageous, typically you will need a minimum of £4000 deposit but you will be restricted where you buy, plus there is additional fees and these homes are all “leasehold”.
Using Bunce – alternative way to own a home – the advantage using Bunce is that you will not need to worry about legal fees, stamp duty, land registry fees as this is all covered by BunceCrowd. Furthermore, there is no need for a deposit. However there is fees to set-up but they are clearly disclosed on the website (£1,500 per application).
How do I apply for a traditional mortgage? – Applying for a mortgage goes hand-in-hand with house hunting, typically, it occurs in two stages.
Stage One: Fact Finding – you can do this at any stage of the home-buying process. However, its a good idea to do it before you even start house-hunting. that way, you’ll have a good idea of what your price range is before you get your heart set on a property.
At this stage, the lender will find out as much as possible about your needs and tell you how much they would be prepared to lend you. there’s no obligation to take out the mortgage, so you can talk to several different lenders in other to find out who would offer you the best terms.
Approval in principle – Once you choose a specific lender, you can ask them for a decision in principle, basically a written statement declaring they’d be happy to lend you the amount you require. An approval in principle makes you more attractive to sellers, because it shows you’ve done your homework and can afford to buy the property. However, it’s not a guarantee your mortgage will go through. The lender may still reject you after conducting more thorough checks.
What documents do I need to apply for a mortgage ? – Every lender is different, however you’ll usually be asked for the following documents and if you prepare these in advance hopefully the process will be faster to complete.
- 3 months payslips
- P60 form, or SA302 if you’re self-employed
- if you’re self-employed, a statement of two to three years accounts from an accountant
- 3 – 6 months worth of bank statements
- utilities bills and evidence of other expenses, such as loans
- proof of your identity
- Don’t go out a buy fancy cars with big monthly commitments
- Pay your bills on time
- Shop around for best deals
- Look at alternative lending
- Control your spending habits to ensure you pass the affordability assessment
- Check your credit score and try and improve it if possible.
- Haggle when you are buying, don’t be scared to put in a cheeky offer