Start off on the right foot
Before you start looking at houses and putting in offers it’s worth doing some initial work on finding a mortgage. You can get what’s known as a decision in principle from a lender that they will lend you a certain amount and this will demonstrate to sellers and estate agents that you’re a serious buyer and will be able to move forward quickly.
Getting mortgage advice
You’ll also need to decide whether you want to get advice on choosing a mortgage. Mortgage brokers can scour the market on your behalf and recommend you the best deal for your situation. Most mortgage brokers will charge you a fee for their services, although there are some fee-free mortgage brokers around. Sometimes they have access to special deals that are not available direct from a mortgage lender.
If you go a bank or building society they will also be able to provide you with some advice on which mortgage to take out. However, they will only be able to advise you on deals within their product range, so you may not get the best deal possible.
Regardless of whether you choose to take advice or not, when you receive a mortgage offer your broker or lender will provide you with a Key Facts Illustration which sets out all the key information relating to your home loan. It’s worth reviewing this in detail and paying particular attention to what will happen to your monthly payments after any special offer you get expires and what fees and commission are payable and to whom.
Mortgage deposits and other costs
In most cases, you’ll be asked to put down a deposit to pay for part of the cost of your house. Generally speaking, the smaller the deposit you put down, the higher the rate of interest you’ll be charged. If you put down a small deposit, you may also get hit with an additional fee known as a higher lending charge.
A typical deposit is 10% of the price of a property but it is possible to put down smaller amounts. If you put down a deposit of just 5%, the number of deals available becomes quite limited. It is possible to put down no deposit at all, but these mortgages tend to be very expensive and carry a much greater risk of negative equity (this is where the value of your home is less than your mortgage, making it hard to move to another property).
There are other costs to consider too. You’ll have to pay for stamp duty, legal fees, valuation, surveys and removal costs. All these need to be factored into your home buying budget.
Salary multiples
Traditionally mortgage lenders have offered people three times their salary. So someone earning £30,000 could get a mortgage of £90,000. If you’re buying with a partner then you might be offered two and half times your joint income. Overtime, commissions and bonus payments may be included in the calculations too, although they won’t be given as much weight as a salary as their payment is not guaranteed.
More recently, mortgage companies have started to offer higher multiples and four or four and half times salary is now quite common. Indeed, it’s possible to get even higher multiples if your job is one where a significant increase in salary can reasonably be expected in the next few years.
Affordability
As house prices have risen ever higher, lenders have started to look at more sophisticated ways of assessing how much money they will lend people. They may look at affordability, and study your income and expenses to see how big a mortgage you can comfortably manage.
They will look at any other debt commitments you have, such as credit cards or car loans. Lenders should also consider if you’ll be able to afford any increase in the cost of your mortgage when any initial offer expires, e.g. a fixed or discounted rate.
Self-certified mortgages
If you’re self employed it can be hard to prove what your typical level of income will be. This is where self-certified mortgages can help. With these home loans, you don’t have to prove your income, but it’s vital to ensure that you’ll be able to afford the repayments on any mortgage you’re offered.
Credit checking
If you want to get a decision in principle or formally apply for a mortgage, a lender will check your credit record before deciding whether to go ahead. Depending on the health of your credit history, a lender many offer you a higher rate than advertised or even decline your application altogether.
If you’re not happy with the offer you receive, you can try another lender. They all use different criteria to decide who to lend to, so a rejection from one lender does not mean you won’t be able to get a mortgage from another. Each application leaves a record on your credit report however.
Insurance and your mortgage
Your mortgage lender will probably be very keen to sell you insurance alongside a mortgage. Some lenders will insist that you take out mortgage life cover which pays off your mortgage should you die. They will want to sell you building and contents insurance as well. They may offer mortgage payment protection insurance too, which is designed to pay off your mortgage debt should you fall ill or become unemployed.
Be warned though, as buying any of these types of insurance direct from a lender can mean you paying much more than you need to. Instead, search for a better deal online and you’ll probably find a comparable protection for a fraction of the price. You may also find it’s worthwhile to look for a general income protection plan, rather than one that’s only designed to cover just your mortgage payments.