How to Prepare for the Mortgage | Money
Get a ballpark figure
One of the first things you should do is get a realistic idea of how much you’re likely to borrow so you can see if it’s worth going ahead. This will depend on three main elements: your income, your expenses and the amount of the deposit you intend to pay.
There are many affordability calculators online that will give you an idea of how much loan you could get. The government-backed MoneyHelper website has one, as do many banks, mortgage brokers, and comparison websites.
When you apply, the lender will do a detailed affordability assessment to determine what you can afford to repay based on your income and spending commitments. Lenders also currently have to “test” your ability to repay if interest rates were to rise or if there was a major change in your circumstances, such as being laid off or having a baby.
Check your credit report…
Long before applying for a mortgage, check your file with one or ideally all three major credit reference agencies: Equifax, Experian and TransUnion. This will alert you to any issues that may result in you being declined or offered a less competitive mortgage rate, such as a default on your file related to a missed payment. In some cases, you may be able to resolve these issues before applying for a home loan, in which case the lender will do their own verification.
Make sure your record is accurate and up-to-date, and dispute anything you disagree with. You can use a correction notice to explain special circumstances that caused past arrears or defaults, such as a period of illness.
Agencies usually offer several ways, free and paid, to check your credit report or score. For example, by subscribing to the Credit Karma website, you can see your TransUnion score for free.
… and keep it in good condition
Keep an eye on your credit report before applying for a mortgage. During this time, try to avoid applying for any other borrowings such as a loan or overdraft if possible, as this may discourage a mortgage lender.
Also, try to avoid buy now, pay later when shopping, as this is a form of credit that will increasingly start showing up on people’s records.
Payday loans are bad news – some mortgage lenders will turn you down if you’ve had one in the last 12 months.
Check your bank statements
A mortgage lender will typically insist on seeing your bank statements for the past three months as part of their financial capability checks, says Nick Mendes of mortgage broker John Charcol. The lender will go through them with a fine-tooth comb to verify that you are financially sound and can afford the repayments. So there’s a strong case for cutting your expenses and reducing or eliminating any overdrafts.
“It’s worth tightening your belt in the months leading up to your application,” says MoneySavingExpert.com.
That might mean cutting back on non-essential extras that show up on a bank statement, such as pub crawls, takeaways, and expensive coffees. You might want to go a step further and ditch things like regular payments to Netflix, Spotify, and the like.
Check your statements carefully. Are you paying for things you no longer use or need, or can get cheaper elsewhere, like cellphone insurance you purchased years ago? If so, drop them.
Familiarize yourself with “income multiples”
Traditionally, the typical maximum amount a person can borrow is four and a half times their annual income. This is called the income multiple.
If it’s lower than you’d like, the good news is that as real estate prices have skyrocketed over the past few years, some lenders have started offering higher income multiples. Halifax and Barclays are among those that will increase the income of high-income borrowers by up to 5.5 times. Mortgage lender Habito will go up to seven times the salary in some cases. Meanwhile, a new lender called Perenna plans to launch mortgages of up to six times salary and is inviting people to join its waiting list.
Increase your deposit
One of the toughest tasks future homeowners face is saving up a down payment – it can take years. Halifax said in January that the average first-time buyer deposit in the UK in 2021 was nearly £54,000 and was 20% of the purchase price.
There are now more mortgages available that only require a 5% deposit than there were at the start of the pandemic. But if there’s a way to save more than 5%, it’ll open the door to more deals to choose from and lower interest rates. For example, currently, fixed rate mortgages where you borrow 90% of the value of the property are generally around 0.4 to 0.5 percentage points cheaper than those where you borrow 95% .
Some buyers may be able to increase their deposit by turning to “mom and dad’s bank” or other family members or friends for help.
Get help from the government
The Lifetime Isa allows you to save for a first home costing up to £450,000. You can set aside up to £4,000 a year until you are 50 and the government will add a 25% bonus to your savings, up to a maximum of £1,000 a year. To open one, you must be between the ages of 18 and 39.
In the meantime, you can no longer open a new Buyer’s Aid Isa, but if you already have one, you can pay up to £200 a month, and the government will boost your savings by 25% (up to to £3,000) when buying your first home.
Register to vote
Make sure you are registered on the electoral lists at your current address. Lenders use it to confirm who you are. Not participating could lead some to refuse you.
Consider a broker
With so many offers to choose from, some homebuyers may feel they need someone to hold their hand. A mortgage broker can research the market and help you find an offer that’s right for you. It’s probably a good idea to use one if, for example, you have credit problems or if your job or financial situation is not easy. There are a number of mortgage brokers offering free advice, including London & Country (L&C).