When you apply for a mortgage, the lender will base its decision on affordability and risk.
Your income and expenditure will be examined in detail, and to borrow the amount you require at the best possible rate, you’ll need to demonstrate that you are more than capable of sustaining your monthly repayments.
1. Start saving
A savings plan will not only boost your deposit but will also prove to the lender that you’re responsible with money. Most mortgage companies ask for a 10-15% deposit, unless you’re using a government-backed scheme; you’ll need a 5% deposit for Help to Buy, or 5 to 10% of the cost of the share if opting for shared ownership, plus around £5,000 to cover conveyancing and other costs.
Set up a direct debit to deposit funds into your account on payday and think about how you can cut back on a day-to-day basis. If you’re now working from home, put aside the money you’d normally spend on fares and lunches. If possible, move back in with your family instead of forking out huge sums in rent.
Are you under 40? Then set up a Lifetime ISA, which will reward you with a 25% bonus when buying a first home costing up to £450,000. And if you opened a Help to Buy ISA before last November’s cut-off date, you can look forward to a bonus of up to £3,000 on completion.
2. Repay your debts
Do your utmost to pay off any outstanding loans – including credit and store card debts – before applying for a mortgage. Don’t seek any more credit in the meantime, and pay all bills on time. It’s also worth checking if you’re paying for any subscriptions you no longer need, such as gym memberships you don’t use.
3. Boost your credit rating
Your credit score is an indicator of your financial health, so make sure it’s as high as possible. Find a free credit report at experian.co.uk, creditkarma.co.uk or clearscore.com, and improve your score by reducing your use of credit. Notify the credit agency of any errors, and make sure you’re on the electoral register as this is regarded as a sign of stability.
4. Consider the type of mortgage
Consider the type of mortgage that’s right for you. Do you prefer a fixed or variable interest rate? A fixed rate will give you security of knowing what you’re paying each month and while a variable rate will cost less, payments will increase if the Bank Rate rises.
5. Get an agreement in principle
Before you start house-hunting ask for a mortgage agreement in principle. This lets you know how much you’re likely to be able to borrow, and if you’re rejected, you’ll have the chance to address any issues and reassess your finances.
You may be tempted to find a mortgage through your bank but a broker has access to deals that may not be offered direct to borrowers. Check that the broker covers the whole of the market – including shared ownership or Help to Buy lenders if relevant – and isn’t tied to particular companies. Also, check their fee structure.
Be mindful an agreement in principle is no guarantee that you’ll receive a firm mortgage offer. The Covid crisis has affected availability, lending criteria has been tightened, and the amount you can borrow may be reduced if you’ve been furloughed.
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