Finances

How to get started on the property ladder – STEP 3 – mortgages 101

Buying a home is the largest purchase you’re likely to ever make, and in most cases you will need a mortgage in order to do this. Arming yourself with the knowledge of what they are, how to apply, and the different types can help you make the right decisions about your mortgage.

Direct to lender vs mortgage broker

You can apply for a mortgage directly from a bank or building society, choosing from their product range, or you can use a mortgage broker to compare different mortgages across the market. In some cases, mortgage brokers have access to mortgages which are not available directly to customers, so using this approach can mean you get a better range of products.

One of the first things to think about is whether you want to apply to lenders directly for your mortgage, or whether you want to hire a mortgage broker to help you find the right mortgage for you.

This is a personal decision, and really comes down to your own preference, but some of the things that might help you decide are:

  1. How familiar with the process of applying for a mortgage are you?
  2. How much time do you have to do the necessary research and mortgage applications?
  3. Is this house purchase a straightforward transaction, or is it a bit more complex?

If you do decide to use a mortgage broker, its worth also spending the time on researching the best broker for you – some will scan the whole market, whereas others might just look at a smaller selection of products. In addition, some will charge you fees, while others will take a commission from the lender.

From my experience I have used both direct to lender and mortgage brokers for different house purchases, depending on the scenario, so there isn’t a right or wrong answer.

Application process

Applying for a mortgage is often a two-stage process.

The first stage usually involves a basic fact find to help you work out how much you can afford, and which type of mortgage(s) you might need. This can involve:

  1. The lender or mortgage broker will ask you a number of questions to determine what kind of mortgage you want
  2. They will also ask for basic information to determine your financial situations to understand what you can afford

The second stage is where the mortgage lender will conduct a more detailed affordability check, and if they haven’t already requested it, evidence of income. This is also usually where the formal application will begin.

Once your application has been accepted, you will be provided with a binding offer and a mortgage illustration document.

Types of mortgages

As we touched on in the first post in this series, there are two different types of way in which you can repay the money borrowed (the “capital”): repayment mortgages and interest only mortgages.

  1. Repayment mortgage: with these kind of mortgages, you pay the interest and part of the capital off each month. At the end of your mortgage term you will have paid off all of the money borrowed.
  2. Interest-only mortgage: in this case you pay only the interest on the loan and nothing off the capital. At the end of the mortgage term you will still have to pay off the amount of capital you originally borrowed.

Another thing you will need to decide on when choosing your mortgage is whether you want a fixed rate or variable rate mortgage. With a fixed-rate mortgage your repayments will be the same for a certain period of time – usually between two and five years. If you have a variable rate mortgage, the rate you pay could move up or down, in line with the Bank of England base rate.

As above, there isn’t always a right or wrong decision here – it is personal preference. Some people prefer the certainty of knowing how much they have to pay each month, but you might take the view that in future you expect the base rate to fall and want to be positioned to take advantage of this potential saving.

Tips for successful mortgage application

There are several things you can do in order to strengthen your mortgage application, even before you are ready to start the process. In fact, for some of these things below, the sooner your start the better:

  1. Build up your deposit. Save, save, save. I know its boring, but the more money you are able to put down as a deposit, the more likely it will be that you are offered a mortgage. Typically having a higher deposit can also means that the lender will offer a slightly more favourable interest rate
  2. Find out your credit rating, and see if there are things you can do to improve it. Using services like Experian you can quickly find out what your credit score is. This number is based on a number of factors, and is used by lenders to determine how favourable you are to lend to. Its not always the case, but typically having a higher score will make the mortgage application process a little easier as lenders will be more keen to lend to you.
  3. Make sure you are registered on the electoral role as lenders use electoral roll data in identity checks.
  4. If you have an old or unused accounts or credit cards, it might be worth thinking about closing these, especially as the details for these accounts might need updating. However, this should be balanced against the fact that for mortgages, longer credit relationships can be seen in a positive light. So, if you have two credit cards, one recently opened and an older one, it’s probably not worth closing the older one before the mortgage application as you could lose the credit score boost it gives you.
  5. Finally, make sure that you have cleared any existing debt and that you pay all of your bills on time for several months prior to the application.

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