How many of us are living in the house that we want to live in for the rest of our lives?
Not many, it’s probably fair to say – for most people reading this, there’s either a) the first home or b) moving up the housing ladder somewhere on the horizon. And, with that could come applying for a mortgage.
When it comes to mortgages, things have changed quite a lot over the last 10 years. Prior to the banking crisis of 2008, mortgages were easy to come by and lenders were quick and easy with their lending. Post-2008, things are quite different, and the rules have changed. All mortgage applications now undergo a new ‘stress test’, for one, making sure the borrower can not only afford the mortgage in the first place, but stay in the home should interest rates rise.
Incidentally, now is a good time to review your mortgage and your borrowing – interest rates (the interest charged on your outstanding mortgage), even with a rise to the base rate (to 0.75% in August 2018), continue to be low, with lenders offering some great rates to attract new business. However, you do need to make sure you have your ‘financial house’ in order before deciding to switch or move. With that in mind, here’s some tips that should help…
Quite simply, any mortgage adviser worth their money will be worried about you passing the ‘stress test’. Therefore, it’s very important to stick to a budget and write it down. It needs to show – clearly – the money coming in and the money going out. For some people, the numbers found can be quite a surprise – how much do you spend on food, for example? Or clothes? How many Starbucks orders are you getting through? For a lender, this will show your affordability (or not!) for a mortgage.
Your credit check details everything about your financial life – money borrowed, money paid back, any direct debits or standing orders missed – so making sure it’s correct and showing you in a good light is essential before even thinking about a mortgage, mainly as it illustrates your ability to borrow and pay back money; a huge tick box for a lender. Checking your credit rating and report is usually free and can be done online.
Taking on additional debt before making a mortgage application doesn’t look good. Reducing rather than increasing your total debt puts you in a better position, so if you have savings or assets running alongside credit card balances, think about reducing your debt to income ratio.
These can get on top of all of us from time to time, but falling behind on your commitments is another area that will show up in your credit check, and will not present the best picture of your finances. In a mortgage lender’s eyes, if your history shows you always pay late, odds are you’ll probably fall behind on your mortgage. Therefore, this will damage your chances of agreeing on borrowing.
One of the most important areas lenders look at is stability and if you’re planning to – or have just – changed jobs, it might hurt your chances of qualifying. Additionally, you will need to show recent pay slips, which you may not have with a new job. Plus – what if your new job doesn’t turn out to be as good as you thought? It’ll be depressing to do a job you hate just to pay the mortgage!
We forget that some significant benefits are written into our employment contracts through things like life assurance and income protection. One thing a lender will look for is protection against the worst happening – i.e. if you die who is going to repay the debt? Of course, it may be sensible to take out further insurance to complement your new financial situation, but don’t forget what you already have.
It’s common for couples to buy homes when entering into new relationships. While this isn’t a relationship guidance article, beware of your partner’s credit history and current financial situation – any joint applications will tie you to them. There’s always renting...?
With interest rates low, banks are not making as much money out of mortgages as they used to, so most have increased their up-front fees. A mortgage advisor (or ‘broker’) should be able to highlight the best and worst parts of your mortgage agreement, but this would be a good time to start reading the small print. While cashback on your application from one provider might seem useful for sofas, TVs and beds, you might end up paying a balloon payment – a balance due at the end of your mortgage – that you may not have done with another provider. There’s no such thing as free money!
Get your paperwork in order! Make sure you have your tax return, pay slips, identification documents and proof of your savings/deposit, and that you’re registered to vote. All these things will help cut down the time of your application. Fill in the paperwork correctly first time, don’t rush it and declare everything. If you miss something out, it could lead to a rejection.
Received a “decline” decision? Ask the lender why so you can fix the situation, and don’t immediately re-apply to the next lender on the list as it might damage your chances.
Instead – stop, breathe, and maybe reflect on the above nine points. Then, start again. You’ll get there.
