On the starting lines of getting your first ever mortgage? Stop and check you’ve done these seven things before you hit the green button.
Applying to borrow hundreds of thousands of pounds is not something you do every day. Check you've done these seven things first and you can be 100% sure you are ready to proceed.
1. Address your debt
In the past, mortgage lenders typically used a simple calculation of 3.5 to four times’ single salary (or, around 2.75 times joint if you were buying together) to work out the amount you could borrow – but that didn’t account for debt.
Since the Mortgage Market Review (MMR) was introduced in 2014, lenders have overlaid these so-called income multiples with tougher affordability rules.
These – rather sensibly – look at what you can afford to repay each month after your expenses and unsecured debts have been deducted from your monthly pay.
This includes outgoings such as household bills, childcare, school fees, gym memberships and even socialising, as well as credit card payments, overdrafts and loans.
The result? The less debt you have, the more you can borrow.
2. Check your credit score
Your credit score lets lenders know how reliable you are when it comes to borrowing money – and a good credit score is a must if you want a mortgage.
The sooner you do this, the better – if there are errors, you can get them corrected and if you have a poor score it will give you the chance to take steps to improve it.
Common flags on your credit report include missing information, entries you don’t recognise, or just inaccuracies – a County Court Judgment (CCJ) that is still on your report, even though you’ve settled the debt in the allocated time, fir example.
Simple ways to boost your credit score include getting registered on the electoral roll, paying bills on time, keeping within borrowing limits, and closing down any credit accounts you are no longer using.
3. Test the waters
Do this by getting what is known as a mortgage agreement in principle (AIP).
It’s essentially a letter from a bank or building society which indicates the likelihood of your application being accepted and the kind of loan amount you might get, based on an initial assessment of your circumstances. It’s free to obtain.
Typically, an AIP will last between 60 and 90 days. If it expires before you need it, you can always reapply. Note however, an AIP is only an estimate – not a formal mortgage offer.
4. Contact a mortgage broker
While you can now increasingly carry out most of your mortgage application online, as a first-time buyer you might want the reassurance of speaking to an expert over the phone or even face-to -face. In this case, try an independent, fee-free mortgage broker such as London & Country.
It will compare mortgages across the whole of the market and help find the best deal for your circumstances in terms of rate, fees and the likelihood of your application being accepted.
Brokers can also have access to exclusive deals – known as ‘broker-only’ – which are not available direct from the banks and building societies.
5. Do your own research
Back up the broker’s findings with your own online research online at comparison websites such as uSwitch.com. This won’t cost you a penny and will ensure you can rest easy in your final decision.
6. Get the paperwork together
Whether it’s digital or hardcopy, there's a lot of documents to get your hands on as part of your mortgage application. This includes photo ID and up to six months’ bank statements.
You will also need to be able to demonstrate that you earn a regular income.
If you are employed, you can do this easily – by providing your payslips.
If you are self-employed, demonstrating your income is a little trickier. You will need to show the lender your business accounts, signed off by an accountant, as well as your tax returns. Work on three years’ worth, although two may be sufficient.
7. Final sense check that you have the best deal
Getting a rate on your mortgage is very important – a few per cent difference can translate into thousands of pounds a year on such a large loan.
That said, it’s not just about cost. You also need to make the right choice on the type of mortgage, as this can directly impact on your future choices and flexibility.
A tracker for example – which is linked to interest rates – is only suitable if you’re sure you can afford a potential rise in monthly mortgage repayments.
If you need to budget carefully, a fixed-rate deal may be the better option as it brings peace of mind that your repayments will stay the same for the agreed period.
Crucially, there's no need to feel any loyalty or obligation to the lender that issued your agreement in principle. You are free to scour the whole market both now and again when you come eventually come to remortgage.