By Howard Robin
EVERY year, hundreds of thousands of Britons finance the purchase of their home with a mortgage.
Research shows that while most will be happy with their choice of flat or house, they won’t always end up with the best financial package for their situation.
Perhaps this is hardly surprising. The mortgage sector is a veritable minefield of jargon, small print and complex calculation. Negotiating one’s way through it can be the most stressful part of buying a home.
However, with a bit of extra know-how, there are ways of getting the optimum deal. From improving credit rating to understanding what lenders are looking for, Eastern Eye looks at 15 ways to boost the chances of securing a mortgage and owning your very own dream home…
Open a Help To Buy ISA now:
The government launched Help To Buy ISAs in 2015 to make it easier for first-time buyers to get onto the property ladder. They are being phased out from November 30, 2019, and replaced by the LISA (a lifetime ISA). Even if a first-time buyer doesn’t intend to buy immediately, it is to their advantage to open one of these free savings accounts before the deadline.
You require just £1 to open an account and can then wait to top it up when you are ready. Under the scheme, the government will give you a bonus of £50 for every £200 you save – up to a maximum top-up of 13,000 on savings of E12,000. You get your bonus when you buy your first home – as long as it’s before November 30, 2029.
There are many Help To Buy ISAs to choose from, but they don’t all offer the same interest rates. The top five are: Tipton & Coseley (2.95 per cent); Darlington Building Society (2.8 per cent); Barclays (2.58 per cent) Nationwide (2.5 per cent); and Natwest (2.5 per cent).
Increase your income multiple:
The average mortgage granted to first-time buyers last year was around 3.68 times annual income, though the average income multiple tends to be higher for higher earners – being generally around four to 4.5 times annual income. Since the financial crash, banks have been allowed to offer only up to 15 per cent of their mortgages at multiples of 4.5 times or more, so it pays to know which lenders offer first-time buyers higher multiples than these.
The highest income multiple is from Darlington Building Society. Its Professionals’ Mortgage offers loans of up to six times annual income – the highest income multiple on the market. However, this deal is restricted to people who work in certain professions.
Those who qualify include accountants, actuaries, barristers, dentists, engineers, doctors, optometrists, solicitors, pharmacists and vets. The deal is available at up to 90 per cent loan-to-value (LTV) on a fixed interest rate of 3.69 per cent for five years.
Top deals for first-time buyers: Other deals for first-time buyers at more than 4.5 times annual income include Newcastle Building Society (5.78); Barclays (5.5); Virgin Money, Cambridge Building Society, Ipswich Building society and Teachers Building Society (five times). Such deals are generally available only to those with incomes of over £50,000 a year and have deposits of at least 20 per cent.
Know how much you can afford:
Mortgage providers won’t lend to people they think may not be able to afford their repayments. In order to maximise chances of securing a loan, you need to be able to prove you can afford it. Be aware that lenders will examine your outgoings and current debts.
They will also carry out a “stress test” to calculate the impact on your affordability of a possible raising of interest rates or changes in your lifestyle such as having children or losing your job.
Reduce debt to income ratio:
Mortgage lenders have to work out with a fine tooth comb the affordability of a loan to you. Before the credit crunch they tended to consider just the size of your deposit, your credit score and the size of your income. Nowadays, however, stringent affordability calculations not only examine your regular outgoings, but also the extent of your debts.
This will include sums owed on credit cards, bank loans, student loans, car finance payments, overdrafts, child support and so on. Outgoings will also include current rent and prospective mortgage payments. They tend to be less interested in the total amount of debt you may have than its proportion of your income.
For example, if your debts and other outgoings came to £2,000 per month and your income was £35,000, your debt/income ratio would be 40 per cent. As a general rule, most lenders would consider you to be a low-risk individual if the figure was 20-30 per cent. Lenders differ on how flexible they are on the income debt ratio, but generally speaking, you’ll find it increasingly difficult to get a mortgage if it was significantly above 40-45 per cent.
So clearing your debts or reducing them as much as possible will boost your prospects of getting a loan or qualifying for a cheaper mortgage product.
Improve your credit rating:
As a general rule, the better your credit rating the more likely you are to qualify for a loan. Also, the better your credit score, the smaller the deposit required. However, if your rating is not where you would like it to be, don’t despair as there are a number of ways of improving it. First, you need to start paying your bills on time. Paying late or paying less than you agreed can negatively impact on your rating.
This applies to all your bills, including credit card bills, car loans, student loans, rent, utilities and so on.
Since most lenders base their judgement on your Experian credit score (one of the main credit reference agencies in the UK) you can start factoring in utility and mobile payments and so on through a new product called Experian Boost This allows aped-an to connect to your bank account to identify utility and telecom payment history and deliver an updated credit score (visit experien.com/boost to register).
Join the Rental Exchange: I
If you are a renter; you can join another Experian initiative – the Rental Exchange – which boosts your credit score if you pay on time every month through an info reader called Credit Ladder. You can register through the Credit Ladder website. It is important to remember if you sign up to this free scheme, you must pay on time or your credit score will be adversely affected.
Register for the electoral roll:
Many mortgage applicants simply have no idea what a huge bearing this seemingly small action can have on your ability to get a mortgage. If your name does not appear on the electoral register, some lenders may refuse your application outright as they use the electoral roll to confirm your identity.
To register is simple. Just go to GOV.UK and fill in your passport and national insurance details.
Get your mall forwarded:
It costs just £60 to get your mail forwarded from a former address for 12 months. Surprising as it may seem, this seemingly innocuous action can save you thousands. Time and time again, it turns out that mortgage applicants moved house and ended up with a default notice on their bill or credit card as they didn’t get their reminder and forgot to pay.
This can have serious repercussions on your credit rating and affect the size of deposit required.
Cut the cost of your mortgage:
Prior to the 2007 credit crunch, you could get a 100 per cent mortgage with no savings. Not so anymore. Banks have become far more cautious and most will require a deposit of at least 10 per cent of the value of the property being bought.
Since most home buyers want to get on the housing ladder as soon as possible, there can be a temptation to apply for a mortgage with the minimum deposit you can raise to secure your loan.
However, this can be self-defeating because the larger the deposit you manage to raise, the cheaper your mortgage will cost you. The reason for this is that the greater your equity, the less of a risk you are to the lender if your home loses value.
Banks and building societies reflect this by having bands where mortgages become cheaper. As a general rule, those with a 90 per cent loan to value mortgage (secured with a 10 per cent deposit) will get the least favourable repayment terms. Those with 75 per cent LTV, secured with a 25 per cent deposit, will pay less. Those with 60 per cent LTV, with a 40 per cent deposit, will be charged the least.
Boost your employment track record:
Lenders will tend to favour your application if you have a stable, long-term job. For various reasons they tend to be wary of those who have been in a job for under a year; so it’s much harder to borrow if you recently changed jobs. The main reason for this is that when it comes to redundancy, most companies operate a last-in, first-out policy and this makes you a riskier candidate. Another factor is that you could be on a probationary period. In such circumstances it is best to wait a few months before applying for a mortgage.
Similarly, if you’ve just started a new role in your company for which you have been given a pay rise, it’s best to wait a few months before applying for a mortgage to give you time to establish a track record in your new role.
What to do if self-employed:
If you are self-employed, the most common problem is having just one year of accounts. Most self-employed mortgage applicants will need a minimum of two to three years of accounts which have been signed off by a certified accountant. Lenders will then average out your net earnings over two or three years.
How to perfect your paperwork:
Getting all your supporting documents together is vital when it comes to mortgage applications. First, you will need a photo ID. If using a driving licence, make sure it shows your present address.
Proof of address is also required. A recent utility or tax bill will suffice. Aim to provide around six months worth of pay slips. If your declared income involves extra earnings and bonuses, some providers may want you to submit P60s. Limited company directors will generally need the last two years of signed accounts and the most recent shouldn’t be more than 18 months old.
If you are self-employed, you will need three years of tax returns signed by a certified accountant. You will also need to provide the last three months of your bank statements showing all your incoming funds and outgoing expenditure.
Shop the whole market:
More and more home buyers are choosing to partner with a mortgage broker. Inthe first three months of this year they secured a market share of more than 14 per cent, their best showing for over a decade. Among their advantages over banks is that they provide more options.
The big banks are limited to their own in-house mortgage products. Mortgage brokers can offer you better rates, faster turnaround times and a much wider range of options as they are in a position to shop from scores of lenders, access a vast array of loan products and wholesale rates to find the optimum loan for your circumstances and lower monthly rates.
Also, because they are licensed professionals who specialise in one thing, their knowledge of the market is generally superior to bank advisers.
Non-standard is a no-go:
If you’re young and desperate to get on the housing ladder, it can be tempting to consider the cheapest options available on the market These might include former council housing, private flats in run-down areas surrounded by council estates, high rise concrete blocks, flats over shops, tiny studio apartments and properties that require major renovation.
While such choices may be dictated by the size of your wallet, they could actually blow your chances of securing a loan as many lenders are reluctant to offer mortgages on these sorts of properties. In the case of ex-council houses and high-rise blocks, lenders traditionally fear they may lose value over time.
Flats above shops and pubs are also considered high risk by lenders because they can be affected by things like noise, smells and anti-social behaviour. It’s also worth bearing in mind that you could struggle to secure a loan to buy any home of less than 30 square metres, including small studios and micro-homes, as demand is particularly niche for such properties which could be difficult to sell in a property downturn.