Applying for a mortgage is a big deal, whether it’s your first or you’ve been on the housing ladder for a while.
There’s so much to think about and consider that it can all get a little daunting. So, to make things a little more straightforward, we’re sharing out top five tips on things to do before you apply for your mortgage.
1) Pay down your debts
A mortgage is a debt, and probably the biggest one you’ll ever have. But with the average UK house price today around the £200k mark, most people would probably be unable to ever buy a home without a mortgage.
When you apply for a mortgage, one of the things the lender will look at is how much you’ve already borrowed and have to repay. Credit card and loan repayments are financial commitments, and if they are taking up too large a chunk of your monthly income, the mortgage provider may worry you won’t be able to afford another payment on top of this.
Our advice? Try to pay as much of your outstanding debt off as possible before you apply.
2) Get saving
If you’re a first-time buyer, you’ll need a mortgage deposit. The days of widely available 100% mortgages are over. Borrowers today are expected to have around 5-10% of the property’s value saved as a deposit. This can equal thousands of pounds.
There are government schemes available – or on the way – that are designed to help you save up your deposit. However, don’t expect it to be something you achieve overnight. It’s worth saving as much as possible, because the bigger your deposit the more you may be able to borrow – or the better the interest rate you’ll get.
3) Check your credit history
The lender you apply to for a mortgage will certainly take an interest in your credit history. This is a record of all your borrowing activity over, at least, the last six years. If you’ve ever missed a repayment or defaulted, your credit history will show this.
And if you have never borrowed before, your credit history will show very little. Unfortunately, a non-existent credit history can be just as bad as a poor credit history in the eyes of a lender. They look at your credit history to get an idea of the kind of borrower you are. If they can see that you always make your repayments on time, this should stand in your favour. If you haven’t, or if they have nothing to go off because you’ve never borrowed, this could work against you.
Read our tips on building or improving your credit history.
4) Cut back
In 2014, the Mortgage Market Review was published and brought about a wave of change in the mortgage sector. Today, lenders are expected to take a very detailed look at all areas of your finances.
As well as considering your income and your regular outgoings, lenders will also ask you about your current spending habits. If you currently take several international holidays a year or splash the cash on getting your hair professionally styled twice a month, they may expect you to give that up in order to free up cash to go towards your mortgage.
Even if you think you can afford a mortgage and to keep on spending how you are, could you still do this if your mortgage repayments increased? Lenders are expected to carry out a stress test, which works out whether you could keep up with your repayments if the interest on them increased. If your current spending habits leave no room for this, you may be turned down.
We recommend cutting back on all your non-essential spending for a few months before you apply for your mortgage. This should show lenders that you’re serious about becoming a homeowner.
5) Work out what you can afford
This is very important as if you apply for a mortgage that you’ll be unable to afford, you’re likely to be turned down. Not only does this mean that you might lose the property you’d been hoping to buy, but it will also have a negative effect on your credit history – which is not what you need when you’re trying to buy a property.
Working out what you can afford to borrow is very important because, as we’ve shown, lenders want to be sure that you’ll comfortably afford your repayments to them. And this should be important to you as well – if you’re forking out vast sums for your mortgage each month and have nothing leftover, you might start to wish you’d never bought a property.
You can use a mortgage calculator like ours to work out how much the mortgage you want will cost you each month. If you can’t afford this cost right now, it’s worth waiting and saving more towards your deposit.
So there you have it – our five tips on what to do before you apply for a mortgage. Now you just have to pick the right mortgage for you! You can read our blog on the different types of mortgage here.
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.