Applying for a mortgage can be mystifying, especially if you’re doing it for the first time. The founders of the financial advice platform, Copper Coin Club, explain how you can boost your chances of getting one.
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There are lots of bewildering stages to buying a house, and getting a mortgage can feel like one of the most mystifying. For first-time buyers, even just being able to get a toe on the property ladder continues to be a challenge, with UK house prices currently growing at their fastest annual rate in 17 years.
Despite this, there are lots of things you can do to boost your chance of getting a mortgage and make the process easier. Twins Sarah and Laura Dove created financial advice platform, Copper Coin Club, to help people improve their financial wellbeing and demystify complex financial processes like applying for a mortgage.
“You should think very carefully about getting a mortgage,” says Sarah. “It’s an extremely long-term investment – most mortgages run for 25 years. So it’s a huge commitment to decide to make monthly payments for that long.”
“There are some risks and if you want flexibility it’s not suited to everyone’s lifestyle,” says Laura. “On the flip side, buying a house can be a great financial asset and it can give you more stability.”
Here, Sarah and Laura answer all the many questions you might have about applying for a mortgage, from which type is the best to go for and what repayments look like to savvy tips and tricks to boost your chances of getting one.
What is a mortgage?
A mortgage is a loan that’s secured against your property. If you can’t afford to buy a home all in one go, you borrow money in the form of a mortgage.
A secured loan means it’s backed against the property you’re buying. This means the property can be used as payment to the lender if you don’t make your repayments.
“A mortgage has two parts,” says Sarah. “It has capital, the amount given to you so you can buy the house. The second part is the interest that’s charged by the lender until the amount is paid back. That’s how the lender makes their money.”
What do I need in place before taking out a mortgage?
Your deposit determines your Loan-to-Value. This is a number used by lenders to determine how much risk they’ll be taking on a mortgage. The lower the number, the more equity you have in your home and the better the mortgage deal you’ll be able to get.
Sarah explains: “If you’re buying a house at £100,000 and you have a 10% deposit, or £10,000, the mortgage required is £90,000. So your Loan-to-Value would be 90%. If you have a bigger deposit, say £40,000, the mortgage required is £60,000. So your Loan-to-Value would be 60%.”
Mortgage deals are tiered according to your Loan-to-Value. The lower your percentage, the less risky you seem and you’ll get a better rate. A bigger deposit means paying less interest, making it cheaper for you in the long run.
There are a number of schemes set up for first-time buyers to help boost savings for a deposit:
- Lifetime ISA or Help-to-Buy ISA - If you put £4,000 per financial year into an ISA, the government will put in an extra £1000 that you can put towards your deposit. To set one up it must be the first time you’ve bought, you must be between 18 and 40 years old, the price of the property must be under £450,000 and it must be a residential mortgage.
- Help to Buy Equity Loan - A low-interest loan from the government you can take out on the part of the home you can’t afford to buy. It means the government take a percentage stake in your property, but you’ll be able to buy a bigger property. It’s dependent on where you live in England and interest-free for the first five years.
- Help to Buy Shared Ownership - When you buy a property and then pay low-cost rent on the bit you don’t own. Whether you’re eligible depends on where you live in England. You normally pay to a housing association. You have the option to buy a bigger share of the home at a later date.
If you can only afford a 10% deposit it’s not all bad news. “At the beginning, you might only own 10% of your property, but as you make repayments you’ll start to own a larger percentage. This means your Loan-to-Value should increase and you can get a better mortgage deal down the line. So, it’s not like you’re stuck on a bad rate forever,” says Sarah.
Work out the costs
“There are loads of costs in buying a home, so it’s good to factor these in at the start,” says Laura. Costs that come with taking out a mortgage include arrangement fees, booking fees and valuation fees.
There’s also the costs of a survey, stamp duty, conveyancing fees and Land Registry fees to take into account.
Gather your personal information
You will need to gather a lot of personal information to make a mortgage application. These include personal details, like a driver’s license, national insurance number and proof of address.
You’ll also need employment details and financial details, like proof of income in the form of payslips, three months’ worth of bank statements and details of any assets and regular outgoings.
When should you get a mortgage in the process of buying a house?
Before you start looking at houses you need to know your budget. Laura and Sarah suggest looking at online calculators to get a general indication of how much you can borrow. You can find these on comparison websites like Money Supermarket, which let you look at more than one lender.
Individual bank websites have their own calculators, but each lender will have different policies.“It might be that one bank will only lend four times the customer salary to first-time buyers whereas another might lend 4.5 times the salary,” says Sarah.
Another option is to reach out to a mortgage broker – a person or company who arranges mortgages between customers and lenders. “They’ll usually be able to give you an accurate idea of how much you can borrow for free, but they’ll also be looking for business at the same time,” adds Sarah.
You could also look at getting an Agreement in Principle. This is a promise from the lender about how much they’re willing to give to you based on your income and outgoings. It’s usually valid for three months and shows estate agents and sellers you’re serious about buying. “You need to be careful not to test out too many at different banks, as it will negatively affect your credit rating,” says Sarah.
What are the main types of mortgages?
This is where you pay back a set rate of interest for a period of time. It’s normally set for two, three or five years and your monthly payments will be exactly the same for this period no matter what happens to external interest rates.
“If you’re buying at the moment because interest rates are so low it might be worth locking in a fixed rate,” says Sarah.
It’s worth noting that once your fixed rate ends you will be moved on to the bank’s standard variable rate. “Once it ends the banks aren’t nice to you,” says Laura. “Their variable rates tend to be more expensive. So you might want to get a new deal.”
This is when your monthly repayments change depending on the interest rate set by the bank, which is linked to the Bank of England Base Rate. If the base rate falls you pay less money, but if it rises you pay more money.
“You’re never going to know which one is the best to go for,” says Sarah. “Some people want the security of knowing what their repayments will be, or want to lock in a cheap rate if they know they’ll live at the property for a few years.”
How do you pay a mortgage?
Repayments are the most common way to pay back a mortgage. Here you have a regular monthly expense that pays off some of the loan amount and the interest every month. At the end of the term of the loan – normally 25 years – you’ll have paid back the whole of the mortgage.
Here you only pay the interest back on what you’ve borrowed every month. This means you never end up paying back your loan unless you sell the property. “It’s not necessarily recommended,” says Sarah. “If you stay in the property for 40 years you will end up paying more than if you had just paid the repayments as well.”
This lets you cut down interest by putting money into a savings account held with the same lender. For example, if you have a mortgage of £120,000 and savings of £20,000, you only pay interest on £100,000. “They’re not that common especially for first time buyers,” says Sarah.
Once you get a mortgage you can overpay by 10% per year without any fees or charges. This means you can reduce the term. “It’s quite a good tactic for first-time buyers, particularly if your salary increases.”
“It’s important to know that if you suddenly come into loads of money and want to pay off a mortgage early you’ll have to pay an early repayment charge because the lender is potentially losing some of the interest,” says Sarah.
Where should you go to get a mortgage?
You can claim directly to the bank by having a meeting at the branch with a qualified CeMAP mortgage adviser, or having a consultation over the phone. This might include getting an agreement in principle as well as advice for the full mortgage application.
“If you do it this way, you don’t want to make loads of different applications with loads of banks because it will impact your credit score,” says Laura.
Applying online means you won’t receive any specialist help or advice on the mortgage products you’re taking out. So, it’s a bit riskier for a first-time buyer.
Brokers or mortgage specialists
“Around 75% of buyers use this method,” says Sarah. “It’s probably even higher for first time buyers.” A qualified mortgage advisor or broker will assess your income and outgoings, make your application for you, and then try and find you the most suitable product at the best rate. “They will have a good idea as to whether you’ll be accepted and they know the little quirks of each lender.”
Before you pick a mortgage broker check what kind of fee they charge – usually £250 to £500 – and find out whether you will need to pay this if the house purchase falls through. “Some brokers say you only need to pay if the house purchase completes so you’re covered in the event it falls through,” says Sarah.
It’s also worth checking whether a broker is Whole of Market. This means they can recommend all the mortgages available, whereas some are limited to certain lenders.
How can I boost my chance of getting a mortgage?
It’s best to have as high a credit score as possible when you apply for a mortgage. This is generally seen as safer and less risky. You can check your credit score for free on websites like Experion. While you do this check make sure all your details are correct and up to date.
Small things can affect your credit score. For instance, making sure you’re signed up to the electoral register is an easy way to boost it.
Try and pay off any debt you have before applying for a mortgage, particularly any loans, credit cards and overdrafts.
“You don’t need to worry about student loans so much,” says Laura. “It’s not seen in the same way as other loans and won’t have a negative effect on your credit.”
“This one’s a bit sneaky,” says Laura. In the three months prior to your mortgage application, it’s good to minimise spending in your main bank account and on credit cards. Lenders will look at your latest three months of bank statements and you want to show your income is as high as possible. This goes towards your affordability assessment.
“If you’re eating lunch out every day or buying clothes your lender will think, ‘we can’t lend as much to you because you spend as much every month on average,’” says Laura. “Ideally you want to delay purchases. In those three months, you want to be at the highest income and the lowest outcome possible.”
Banks prefer it if you’ve been in the same job for at least three to six months before you apply for a mortgage, not counting a probation period.
Getting a guarantor can boost your chance of getting a mortgage. This is when someone else, usually a family member, agrees to pay your mortgage if you can’t. “Obviously, that’s a big commitment and not everyone has someone able to do that,” says Laura.
What if I’m self-employed, or have been furloughed?
“Lloyds TSB and Virgin Money have said they won’t accept anyone who’s on furlough,” says Sarah. However, some lenders will accept you with valid return to work documents. Others are happy with a letter from your employer saying your earnings as guaranteed.
If you’re self-employed you will need to provide proof of your income. This will normally be two or three years of accounts, tax forms from HMRC and evidence of upcoming payments or contracts. Banks prefer your account to be prepared by a qualified chartered accountant.
“It can be hard if you’ve just started freelancing or if you work in the gig economy and have loads of random payments coming in,” says Laura. “You’ll just have a much smaller pool of products to pick from.”
What happens after your mortgage has been approved?
After you’ve completed your mortgage application and found a place you want to buy the lender will value the property to make sure it’s worth the loan. If everything works out you will get a mortgage offer.
Next, your solicitor will check the offer, carry out searches and liaise with the vendor. Then it’s time to sign contracts and buy the property. Once contracts are exchanged the sale usually completes in one week after the lender has sent their money.
Speak to a financial adviser registered with the Financial Conduct Authority before taking any financial advice, and think carefully before making any decision.
Images: Copper Coin Club