Six mortgage market dos and don'ts
Buying a home isn't an easy process – follow our six-step guide on what you should and shouldn't do when trying to secure that all-important property.
1. Seek professional help
Although it's possible to do your own research about areas and property types that you may like, buying a home is a complicated process. Calling on the help of a professional will ensure you haven't missed out any options. Go to unbiased.co.uk and type in your postcode to find a mortgage adviser close to you.
2. Borrow money
If you've never taken out a credit card or personal loan, it could actually be worth borrowing some money – so that you can pay it back and build up a good credit rating. This activity will prove you are a responsible borrower and a good credit rating will also give you access to the best mortgage deals.
3. Organise your paperwork
Have to hand at least three months' bank statements to show you don't exceed your overdraft limit. Before submitting a mortgage application also have to hand proof of identity, your P60, details of any loans or credit cards and recent payslips.
4. Fall for the headline rate
Dan Clayden, spokesperson for IFA Clayden Associates, says: "Don't become a mortgage moth and get drawn in just by the headline rate." You also need to factor in the costs of arranging a mortgage. Some lenders may offer lower charges so you need to work out if these offset the higher mortgage rate and subsequent monthly mortgage bill – or not.
5. Bank on rising property prices
In the past, buying a home was seen as a major investment and homeowners relied on the fact that their property would increase in price – this isn't the case now. Instead, view your property as a "stepping stone" that gives you the freedom to decorate and alter it as you like, says Kevin Tooze, spokesperson for IFA Equity Partners UK.
6. Stay on the SVR
Every mortgage lender has a standard variable rate of interest, or SVR, on which it bases all its mortgage deals, including fixed and discounted rate and tracker mortgages. When special deals come to an end, the terms of the deal usually state that the borrower has to pay the lender’s SVR for a period of time or pay redemption penalties. The lender’s SVR is, in turn, based on the Bank of England’s base lending rate decided by the Bank’s Monetary Policy Committee (MPC). Every time the MPC raises its rate, mortgage lenders generally increase their SVR by the same amount but when the MPC lowers its rate, lenders are often slow to pass this on or don’t pass on the full cut to borrowers.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
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.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.