10 tips to grab a mortgage deal
The Bank of England’s decision to cut interest rates means many people are enjoying incredibly low rates on their home loans, and the headlines are full of reports about cheap mortgages. But in order to benefit from a cheap mortgage, your application has to be accepted.
Here are 10 tips to help you secure a mortgage at the best possible rate.
1. Check your credit report
“Checking your credit report is always a good option, and not only for those who’ve had problems in the past,” says Peter Gettins, product manager at London & Country Mortgages.
Take the time before applying for a mortgage to go over your credit report. Look out for mistakes that could cause you problems such as late or missed payments that are incorrect.
“Lenders want to see good management of credit, so having too little (or none at all) can also be a barrier,” adds Mr Gettins.
2. Get on the electroral roll
Lenders use data from the electoral roll to check your identity. If you aren’t registered to vote it could adversely affect your mortgage application, so take a few minute to register or update your details, at Aboutmyvote.co.uk.
3. Clear your debts
If you have any debts, try to clear them before you apply for a mortgage. “It is the amount of monthly payments which is important,” says Ray Boulger, senior technical manager at mortgage broker John Charcol. “On credit cards, lenders assume the monthly payment will be 3% to 5%.”
So by paying off those debts, you reduce your monthly outgoings, which will help with affordability calculations.
“Paying off credit card debt will usually increase the maximum loan by more than the amount paid off,” adds Mr Boulger.
4. Cancel direct debits
“Lenders now conduct detailed affordability assessments covering your income and outgoings, not just a simple income multiplier. So it makes sense to review your expenditure,” says Mr Gettins.
Look for any under-utilised subscriptions, such as gym membership, TV packages, or club fees and ditch them. “They are a waste of money, so it’s sensible to cancel them in any case, but by boosting your disposable income you may be able to get a bigger mortgage.”
5. Switch energy providers
While you are going through your expenditure, check whether you could be getting a better deal on anything from your gas bills to your home insurance. “If you’re on a high energy tariff, for example, that could impact the amount you can borrow,” says Mr Gettins.
Switch to cheaper deals and not only will you save yourself money, you could also improve the way your finances look to lenders. Go to www.moneywise.co.uk/compare.
6. Cycle to work
Lenders will also include travel costs in their affordability calculations. “So if you can cycle to work instead of taking the train that could have a positive impact,” says Mr Gettins. “It’s really important, though, to remember that this expenditure cutting isn’t simply a box-ticking exercise or a way to ‘get around’ the affordability assessment.
“If cycling to work is the only way to meet affordability requirements, you’re probably at the very limit of what’s possible. So you need to be realistic about the lifestyle changes that might be involved and willing to stick to them. Otherwise, the danger is you will end up with a mortgage you can’t actually afford.”
Alternatively, look at whether you could walk further to a station that would make your rail commute cheaper, or take a bus instead.
7. Stop saving
It seems counter-intuitive, but in the build up to applying for a mortgage you may want to stop saving money. “Regular savings may be seen as a ‘commitment’, so putting aside substantial amounts each month could limit your borrowing capacity,” says Mr Gettins. This is because a lender will see the regular sums being squirrelled away and include it as a monthly expense. That would cut down how much a lender might think you could afford to repay on your mortgage.
“Consider suspending those payments for a while – you can always resume them later if money permits,” he adds.
8. The bigger the deposit, the better
“The smaller the deposit, the higher the credit score required,” says Mr Boulger, so the more money you can put forward the better your chances of being accepted for a mortgage.
The bigger your deposit, the better the interest rate you’ll be offered too. “There is a particularly big drop in rates with a 10% deposit instead of a 5%,” he adds.
For example, the best buy rate for a mortgage with a 10% deposit (at the time of writing) is 1.94% from Yorkshire Building Society. For a 5% deposit, it jumps to 2.69% from Cumberland Building Society. On a £200,000 home with a 25-year mortgage that is a £120 a month difference in your repayments.
9. Opt for a longer mortgage term
Most people opt for a 25-year mortgage term, but it is possible to borrow over a longer period. Choose to go for a 35-year term and your monthly repayments will come down substantially.
That could make all the difference with lenders when it comes to your affordability calculations.
Just be aware that your age could limit how long a term you can go for. Most lenders won’t give you a mortgage that you would still be repaying past your 70th birthday. So if you are over 45, you will struggle to get a mortgage term that is longer than 25 years.
10. Use a mortgage broker
Every lender is different and how they assess your income and expenditure can vary a great deal. One bank may turn you down flat while another welcomes you with open arms. The difficulty is working out which lender is the right match for you.
“The maximum loan for the same person, or couple, can vary considerably from lender to lender,” says Mr Boulger. “This is one area where a good independent mortgage broker can help a homebuyer choose the best lender for their particular circumstances.”
You can find a local broker via Unbiased.co.uk or Vouchedfor.co.uk.
Your credit score is a three-digit number (ranging from a low of 300 to a high of 850) calculated from the information in your credit report. Your credit score enables lenders to determine how much of a credit risk you are. Basically, a low credit score indicates you present a higher risk of defaulting on your debt obligations than someone with a high score. If you have a low credit score, any products you successfully apply for will carry a higher rate of interest commensurate with this risk.
A report containing detailed information on a person’s credit history, a record of an individual’s (or company’s) past borrowing and repaying, including information about late payments and bankruptcy. It also includes all applications a person has made for financial products and whether they were rejected or accepted. Your credit report can be obtained by prospective lenders to determine your creditworthiness.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.