Applying for a mortgage? Well done you. Need a helping hand?

By Iona Bain
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Once you have gathered together your deposit, and built up a sound credit history, it’s time to apply for a mortgage.

This process is not quite as quick and easy as it was before the financial crash.

The borrowing test

In the boom years, banks used to lend as much as they could get away with, often 100 per cent of the property price, and sometimes even more – so people could be borrowing hard cash on a 25-year payback. Checks on income and ability to pay back were often cursory.

Under rules which came into effect in April 2014, lenders must now obey strict guidelines to check whether a borrower can afford their mortgage repayments, not just at current interest rates, but also if interest rates shot up to 6-7 per cent.

This is certainly making life more difficult for first-time buyers, particularly if they are on a low income or are self-employed, now unless your raking in the dough, the chances that you will pay for your property in cash are slim. So you will have to start thinking about improving your credit score - what to know how? Read this handy article. The worst thing you can do is apply for a mortgage prematurely. A general rule of thumb? The higher your deposit, the better your chances (and the cheaper your mortgage will be in the long-term). So don’t ever apply for a mortgage until you are confident you will be accepted, as a refusal could harm your credit score.

Using a broker

Is it worth consulting a mortgage broker? Definitely. This isn’t a cost-free option (as I will explain in future blogs) but he or she can advise you on the lenders who are most likely to accept, and on good terms. Also, never lie to a mortgage broker about your financial circumstances or exaggerate your earnings. This amounts to a mortgage fraud, so don’t even think about it.

Affordability

The big factor in deciding the size of your mortgage is your income, or the joint income of you and a partner or other co-buyer you are applying with.

In the good times, that sum might be up to five times your income(s). Now it might still be four times – if you have a good credit history – but it is supposed to be based on a more detailed analysis of your commitments and outgoings as well as your income. The new buzzword is ‘affordability’.

So mortgage 'interviews' or application forms have got harder. You will have to estimate your regular spending on the things you tend to forget about but which do add up: gym membership, insurances, car costs, entertainment and eating out, the weekly shop. So that exercise in budgeting that we recommended in the very first blog doesn’t just make it easier to save for a deposit – lenders will actively look for erratic spending and weigh it up when deciding whether you will be able to make mortgage payments.

Passing the test

The best advice is to be honest and co-operative throughout. Yes, there may be an annoying amount of paperwork to comply with but set aside small, regular time slots to deal with it. Consider a relatively small investment of your time for a far bigger cause. Most lenders will ask to see bank statements for the three months prior to an application. So if you know you are about to apply, keep a close eye on your budgeting over those three months (not that you should let it fall by the wayside the rest of the time!).

Maximising your deposit

Just to re-iterate; put up as much as you can for the deposit if it's your first mortgage, as borrowing less means less risk for the lender, and hopefully less close scrutiny for your finances, as well as lower repayments and/or a shorter repayment time.

You will need at the least a five per cent deposit for a 95 per cent ‘loan to value’ (LTV) mortgage. Standard first-time buyer mortgages tend to be 95 per cent LTV, and government schemes assume new buyers will only have that five per cent upfront. But if you can manage 10 per cent or more, it should mean a lower mortgage rate, as well as lower repayments.

For instance, if you are saving in a Help to Buy Isa paying 3 per cent, and you are for whatever reason not in a desperate hurry to get homebuying, and you already have a five per cent deposit, think of it this way: your money will be working harder and earning a better return for the time being than if you had begun a mortgage costing 2 per cent, and your savings were going into repaying the mortgage instead.   Not only that, but in the Help to Buy Isa you are storing up a 25 per cent bonus on your cash too if you stick with it for the full five years.

The value of equity

Loan to value becomes a vital ratio as time goes on. If you have a 95% LTV mortgage you will start off owning 5 per cent of the ‘equity’. But if prices in your area suffer a dip of 5 per cent, you will own no equity, and if they fell 6 per cent you would be in ‘negative equity’. If all goes well, you will chip away at the loan as the years go by and own more equity, which will help you invest in your second home, perhaps even with a lower LTV mortgage. But remember, although property prices are likely to rise over time, they may not go up in a straight line, so the more equity you can hold at any time, the better.

Finding the right deal

This is a big financial decision, not one you can necessarily take with a quick scan of even the best comparison site. For instance, is the loan at 1.5 per cent with a £999 fee better for you than the one at 2 per cent with no fee?

Your estate agent may also offer you the services of a particular mortgage broker. Don’t be bullied – the broker is likely to be paying a fee to the estate agent that could inflate the cost of your mortgage. Plus, the chosen broker is unlikely to give you a full overview of the market. Estate agents are required by law to let their clients decide which broker they want to use, so exercise your consumer rights.

Brokers

Mortgage brokers understand the detail of a huge and complex market, and they are typically paid not by you but by lenders for getting your business.  That means you have to watch out for whether they are tied to specific mortgage lenders, and will only recommend their products. Others will choose from only a limited range, though they may claim to be ‘whole of market’ on the basis that their choice covers what is typically available. Those who genuinely scan all of the market may be able to find the best deal for you, though not necessarily. There will be an “initial disclosure document” which will spell out how much of the market a broker reaches.

A broker will be particularly valuable if you are self-employed or have any credit history problems. They know which lenders are comfortable with trickier circumstances, and you will be glad to have them on your side. They could be the difference between acceptance and refusal for the particular kind of mortgage you need.

Although some lenders such as Direct Line and HSBC do not sell through brokers at all, many others will offer a better deal through a broker than to you if you went on your own.  If a ‘direct’ deal looks good, compare it with similar deals your broker can offer. One strategy is to do a ‘soft search’ on lenders by making dummy applications on their websites, to find out what you can borrow with the deposit you have. Then have a consultation with a broker to see if they can beat the deal.

Brokers also keep up-to-date with all the latest deals, rate cuts and innovations (such as the government sponsored home-buying schemes) that could make your life easier. They act as a helpful go-between during the whole process, taking care of admin and holding your lender to account.   

At some point in the process your mortgage broker will offer you contents and buildings insurance too. By all means get a quote, but be aware they will get a commission for selling these products, which you may end up paying for – shopping around for insurance always saves money because the market is so competitive.

Complaints

Finally, things may not go according to plan. If you believe your broker has given poor advice, complain in writing to them. If the issue isn’t resolved to your satisfaction within eight weeks, you have recourse to the Financial Ombudsman. But don’t forget that complaints may not be upheld in your favour if the broker clearly explained the deal, and all its possible ramifications, and you signed a formal agreement to acknowledge this. Therefore, it really pays to ask as many questions as possible, understand everything your broker tells you and feel comfortable with what you’re doing before you commit. If the information is unclear, poorly presented or obscured in any way, find someone else.

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