How to secure the best mortgage
Aside from getting married or having children, getting a mortgage is one of the biggest commitments you will ever make in your life. And even if you’re a dab-hand at borrowing money, it will probably be the largest debt you’ll ever have, although one that will give you an appreciating asset (hopefully) over the long term.
Regardless of whether you are getting a mortgage for the first time or remortgaging, there are several factors that can improve your chances of being approved for a home loan, as well as getting the best rate and term available.
Before you apply for a mortgage
Prior to even engaging a mortgage advisor or broker, take a serious look at your debt-to-income ratio (DTI), borrowing track-record and spending habits. The aim is to position yourself as a sensible and low-risk candidate and it helps to get ‘credit-ready’ well in advance. This includes:-
- Registering to vote – arguably one of the easiest things to do and helps to verify your identity.
- Pay off debt – over 60% of UK adults started 2020 with some type of personal debt, so aim to get your DTI ratio to less than 40% by paying off store cards, credit cards, finance agreements, overdrafts and loans.
- Bring accounts up to date – ensure your address, payment history and financial associations with other people are correct; inactive accounts, store cards and credit cards are closed and your tax returns are filed, if you’re self employed.
- Stop applying for credit – having multiple credit searches on your files can have a negative impact on your credit score, particularly if an application was rejected, but also if it was successful.
- Cut irresponsible spending – lenders will not only look at your committed expenses, such as debt repayments and bills, but could take what you spend on health and beauty, entertainment, gambling and holidays into account when stress-testing your ability to repay a mortgage.
Work out the deposit you will need
How much money you can borrow is usually determined by how much you earn, usually capped at 4.5 times your annual income (your income will be combined if buying jointly). Lenders will then carry out affordability and stress tests to see if your finances could cope with monthly payments now and in the future. This will take into account spending habits and possible lifestyle changes impacted by external factors, such as a mortgage rate rise, and personal predicaments, including a pregnancy.
In simple terms, if you have a combined income of £60,000, you could potentially borrow £270,000. You may have the potential to buy a property up to £300,000 in value with a 10% deposit. In this scenario, you would need to save £30,000.
Save the biggest deposit possible
On the whole, the larger deposit you have, the better – and the cheaper your mortgage rate will be. This is because there is less risk to the lender if your property goes down in value. The interest rate you will pay will likely go down when your deposit amount typically reaches the 10%, 20% and 40% thresholds. So those with a 40% deposit will be eligible for a wider range of mortgage products at the best rates.
Explore Help to Buy
If saving for a large deposit seems like a stretch, you could always sign up for the new Help to Buy Equity Loan Scheme launching this autumn. It’s important to note that you don’t always have to take out the entire amount available to borrow. Instead, it’s much better setting your budget based on how much you’d feel comfortable paying each month. If you have a £30,000 deposit and borrow the full £270,000 for example, you might expect to repay £1,300 per month. But if you opt for a cheaper property and only borrowed £220,000 for example, your monthly repayments could be more than £250 less.
Understand the mortgage products available
Assuming you’ve now saved the deposit and started your property search, you need to explore what type of mortgage product would best suit you and your circumstances.
If you want the certainty that your payments won’t change for a set amount of time, opt for a fixed-rate deal. If you’re hoping to benefit from plunging interest rates – but don’t mind the risk of paying more if rates start rising – go for a variable or tracker deal.
There are many more options to choose from, and which mortgage product you go for will largely depend on your attitude to risk and your short to medium-term plans, such as whether you want to move again soon.
You’ll also need to shop around and check the finer details with each lender, such as the mortgage terms available for your age, any arrangement fees, early repayment or overpayment fees, and the ability to take mortgage holidays.
Have you found a property you would like to buy? Contact us for further information.