Whether you are a first-time buyer, looking to remortgage your home or other property or seeking to find a buy-to-let property, then you will be faced with tackling the mortgage application process.
If you have applied for a mortgage before then you may be familiar with the steps of acquiring a mortgage but different mortgage providers have different quirks that you may find catch you out so even for a seasoned borrower, it is worth reading on.
The beginning of the mortgage application process begins with you answering vital questions which will have significant and potentially long term consequences.
The preliminary questions you should be asking yourself before you begin the mortgage application process are:
1. How much can you borrow?
You will probably know what you are comfortable borrowing.
However, most lenders apply their own criteria of what they will allow you to borrow which may not accurately reflect what you think you can sensibly borrow or what you would like to borrow. We know that can be very frustrating for many clients.
As a starting point, lenders apply an income multiplier, different lenders will apply different multipliers for different circumstances. Let’s say for example Lender x states that in your circumstances then will lend up to four times your income. If you have a joint income then the combined income multiple will be used. For example, if you are a couple that earns £80,000 combined, then potentially lender x will potentially loan you up to £320,000 to buy your new home. (£80,000 x 4 multiplier = £320,000).
Any loans outstanding will be factored into that decision-making process by the lender, which complicates matters even further.
2. Can you afford to pay the monthly mortgage premiums?
You will also probably know what you are comfortable repaying.
You know what your next income is and know what your outgoings are.
However, lenders often apply their own modelling criteria of what they believe you can afford to repay and therefore your net disposable income as you see it, may not be the net disposable income that they apply to determine whether you can afford to pay the mortgage premiums.
You for example may have a net income of £1,000 and you know your outgoings excluding rent or an existing mortgage is £500. Your net disposable income as you see it may be £500. The lender however may determine by their modelling that your net disposable income is only £400. They will therefore use the lower figure to determine if you can meet their affordability criteria.
3. What type of mortgage should I take
Think about interest rates and the general way they are going, are they likely to go up or down? If you think they are going generally down would a standard variable rate be a better choice for you?
If you are less worried about certainty and perhaps more financially savvy would you want a bank of England Base rate tracker? LIBOR tracker?
If you want more certainty as to what your monthly payments will be, will a fixed-rate mortgage be better for you? If so for how long?
4. If I take a special deal mortgage how long should I tie myself in for?
Think about your short, medium and long term plans: If, for example, you are planning to have a child, will a 5-year fixed deal tie you in for too long for example because you may want to move home to accommodate a growing family?
Am I potentially likely to relocate my work anytime in the future?
What would the early repayment charge be if you did move sooner and want to get another mortgage? Is the mortgage portable?
5. What features do you want with your mortgage?
Do you want some cashback? Do you want free legal or no survey fee? Do you want a mortgage that has no application fee?
These “freebies” can be appealing in the first instance but overall, for cost comparison purposes, will a fixed-rate mortgage of 2.89% for example with free legals and no valuation fee be overall cheaper than the same or similar mortgage with a rate of 2.79% but where you pay your own legal fees and for the survey?
6. How much deposit do you need?
Very simply put: the usual rule of thumb is that the more you can afford to put down as your deposit, the better the mortgage deal you are likely to get. Evaluate and assess your current position. Are there any additional savings that you could redirect towards your deposit?
7. What are the other costs involved?
From the outset, it is wise to consider the additional fund to cover the stamp duty, survey fees, lender fees, broker fees and Solicitors fees. As a very rough guide, it is typically 2-3% of the house price that you will need to cover these costs.
8. When should I start to apply for a mortgage?
This question is a bit of a chicken and egg question. In some ways, why go through the hassle of applying for a mortgage until you have found your dream home. Yet on the other hand, why even bother looking until you know how much you can borrow.
Perhaps you should take a two-stage measured two-stage approach:
Stage 1: First find out how much you can borrow and make a preliminary application and get what is known as an Agreement In Principle. This is a confirmatory letter from your chosen lender that in principle they will be willing to lend you a certain amount of money. It is NOT an offer and not a guarantee that they will, but it is a good starting point.
You do not need to have an actual property against which you wish to borrow to get an Agreement.
Vendors do take you more seriously it seems when you waft an Agreement In Principle in front of them.
Stage 2: Then, more confidently, you can search for your dream home within the borrowing limits that you have.
Once you have found that home and put in an offer, you can then “convert” that Agreement In Principle to a full mortgage application and hopefully that will lead to a formal offer being made by the lender to advance you the money you need to purchase that home or investment property that you dream of.
Top Tip: Check your credit file
Far too often we find that clients say they have a good credit score and progress their application only to find that there is an error on their credit file which can take sometimes months to get resolved. Often that leads to them losing the property as the vendor moves on and offers the property to someone else when they get tired of waiting.
Check your credit file NOW and make sure that there are no errors on it.
The information provided in this article is not intended to constitute professional advice and neither is it a recommendation. You should take full and comprehensive legal, accountancy or financial advice as appropriate on your individual circumstances by a fully qualified Solicitor, Accountant or Financial Advisor/Mortgage Broker before you embark on any course of action.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE.
For expert mortgage advice for first-time buyers, contact us now.
Shak Inayat | 073 76 76 73 44
Penn Financial | 0333 34 44 34 8