Buying a home is one of the biggest financial commitments you will ever make. Very few people can afford to buy a home outright, so most will require a mortgage to do so.
In recent years, mortgage lending has become stricter. In the past, lenders multiplied your salary by three to five times – known as loan-to-income ratio – to decide how much to offer you. Now, mortgage lenders will cap the amount you can borrow at a maximum of four and a half times your income but will also calculate your affordability of the loan based on both your income and your outgoings.
As soon as you are considering buying a property you should start finding out about mortgages. This will give you a guide to the price bracket to search in and will mean you can act fast when you find a property you like.
How much to borrow?
- Be realistic about how much you can afford to pay back on a monthly basis. Don’t automatically take on the maximum that you are offered without being sure that you can comfortably manage the repayments.
- Keep in mind that interest rates can change, therefore your monthly payments may increase or decrease.
- Allow for changes in your salary or work circumstances. For example, if you plan to reduce your working hours or take a break to start a family
- Think about other expenses associated with owning a house such as council tax, utility bills, insurance etc.
Deposits
The amount of deposit you have, (or equity in your property if you’re remortgaging) will influence how much you can borrow and at what rate. In most cases you will need at least a ten per cent deposit.
The higher the deposit you have, the better your mortgage rate will be. Having a larger deposit also reduces the risk of negative equity (where the value of your home is less than the outstanding mortgage).
Remember, to take other costs associated with buying a new property into consideration when working out how much of a deposit you can afford, for example, legal fees.
Getting a mortgage
From 26 April 2014, the Financial Conduct Authority (FCA) introduced new processes for getting a mortgage. The new rules were introduced to avoid people falling behind with payments or losing their home as a result of over borrowing.
Anyone selling mortgages must be registered with the FCA. You can check the FCA register here.
Things to watch out for:
- When talking to lenders or mortgage brokers ask if they are offering information or advice. To offer advice they must have undergone specialist training
- Check how interest is calculated. There are many different ways to calculate interest and this can make a difference to your monthly payments
- If you want to switch your mortgage to a better deal or pay it off early there may be redemption charges
- If a mortgage is described as CAT (charges and access terms) standard, this means it adheres to government standards and should be reasonable value with no hidden charges.
Once you have chosen the mortgage you want, make an appointment with your lender. You may need to take along the following:
- Three months pay slips from your employer (or three years accounts if you are self-employed)
- Proof of the length of your contract
- Copies of three months bank statements
- Proof of twelve month mortgage or rent payments
- Copies of insurance policies (building, contents and life insurance)
Once you’ve filled in the application form the lender will consider all of your income details and do a credit check. They will then give you an acceptance in principle which is useful to show a seller. However, this does not guarantee that you will definitely get a mortgage for a particular property.
The final application will not take place until you have had an offer on a property accepted.
Types of mortgages
There are many different types of mortgage available and it’s worth comparing and speaking to different lenders. There are a number of mortgage comparison websites which can be useful as a start and you can get advice from an intermediary.
An intermediary could be:
- An independent financial adviser (IFA)
- An estate agent
- A solicitor
- A mortgage broker
- An accountant.
Features and benefits of mortgages vary greatly, but no matter which mortgage you choose you will have to repay the amount borrowed plus interest.
Repayment mortgages
- Monthly payments are used to repay the amount borrowed and the interest
- Monthly payments are typically higher
- At the end of the term, the loan is guaranteed to have been paid in full.
Interest only mortgages
- Monthly payments used to repay the interest only
- At the end of the term, the capital is still outstanding and must be paid
- Usually, money is deposited into a long term savings plan for the length of the term ensuring money is available to repay the capital
- The buyer is liable for the shortfall.
Over the term, there probably won’t be much difference in the total cost of the mortgage. However, it’s worth remembering that only repayment mortgages guarantee that your monthly payments will cover the entire loan.
Most mortgages are paid back over a 25 year term. However, if you can afford higher monthly payments, it’s worth reducing the term which means you’ll pay less to the lender in interest. It’s also possible to have a longer term which will lower your monthly payments but you’ll pay back more in interest.
Bridging Loans
If you are buying and selling a property at the same time, you may need to take out a bridging loan to ensure that you have the funds to continue with the purchase. This means that the bank will lend you the money for your new home before your current home has sold, like a very short-term mortgage.
However, it can be a very expensive solution so it is worth speaking to your mortgage adviser to get more information.
What to do if your mortgage application is rejected
There could be many reasons your mortgage application is rejected; credit rating, income, employment status, problems with the property. You can ask the lender for reasons for the rejection. You may want to try other lenders.
If the reason is because of your credit history it’s worth checking with credit agencies that they hold the correct details for you.
If you feel you have been treated unfairly by a lender or broker you should approach them first to try and resolve the problem. However, if there are no suitable resolutions you make a complaint to the Financial Ombudsman Service.