Getting your first mortgage
For many people home ownership is a financial priority, and often one of the biggest decisions you will ever make. This is why getting your first mortgage needs careful planning and preparation in order to consider all of the options available. Here are our tips to improving your position as a prospective borrower.
Pay off your debts
Banks and Building Societies are more welcoming to mortgage applicants who have no or few other debts, as they are regarded as lower-risk borrowers. Not only will clearing your debts give you a better chance of getting a mortgage, it will also give you a greater capacity to borrow. This is because most lenders now employ an affordability criteria (where your monthly debt repayments are subtracted from your monthly income when calculating how much you can borrow), instead of straightforward income multiples (where the lender multiples your gross annual salary by say, three or four, and this determines how much they will lend you).
Save as much as you possibly can. Lenders favour applicants with at least 10% of the property value to put down as a deposit. What’s more, the greater the deposit you have, the greater access you will have to the cheapest mortgage deals.
Make sure you are saving in a tax efficient account such as an ISA (an Individual Savings Account). There are two types of ISA: Cash ISAs and Stocks and Shares ISAs. Cash ISAs operate as a normal savings account: you can get your money back at any time and they’re suitable as a short term investment or savings measure. Alternatively you can choose a Stocks and Shares ISA. This is normally for those who are seeking a better return than cash savings accounts are currently paying and are happy to set aside their money for at least five years. As with any investment involving stocks and shares, your ISA investment may go down in value as well as up: there are no guarantees that you will make a profit.
Or look out for the new Help to Buy ISA scheme, due to be launched this autumn, where the government will add 25% on top of what you save each month (subject to savings limits).
Keep orderly financial records
Lenders want to see evidence of a consistent and reliable income, so be prepared to show your bank statements and pay slips. If you are self-employed, you will have to show the lender your yearly accounts compiled by a reputable accountant.
Address your borrowing past
Check your credit report from a credit reference agency such as Experian or Equifax before applying for a mortgage. This sets out all current and previous borrowing you have made and shows up difficulties a lender might identify, such as defaults, arrears and any County Court Judgments.
Getting familiar with the contents of your credit report will give you a chance to amend incorrect or unfair information by adding a ‘notice of correction’ to your report which lenders are obliged to consider. It is also a good way of to look out for evidence of identity theft too.
Make sure you are on the electoral roll
If you are registered on the electoral roll for every address that you have lived at, it will help to confirm your identity and address history, evidence your lender will want to see. It can also improve your credit score. Contact your local council for more information on electoral roll registration.
Find the right mortgage deal
Once you are in a position where you are likely to be accepted for a mortgage, it is important you find the best deal for you. This means more than just securing a competitive interest rate – for example do you need to know exactly how much your monthly payments will be or can you take the risk that payments will fluctuate? How much can you realistically afford to pay per month for your mortgage or can you afford to pay any upfront fees?
There are a number of mortgage lenders, each offering different products and arrangement fees, so it can be difficult to compare mortgages on a like for like basis. A mortgage specialist or adviser will be able to find a product to suit your circumstances.
Taking guidance from a mortgage expert can not only save you money, it can be invaluable if you have been refused a mortgage or if you just fall outside the box – for example you are self-employed, have a patchy credit rating or have lived outside the UK for some time.