There is good news at last for anyone hoping to buy a home this year. An unexpected drop in inflation has led to several major lenders slashing their interest rates for some products to below 4% for the first time in almost 18 months. The Independent reports that this will provide welcome relief for both existing mortgage holders and first time buyers.
There is speculation that the Bank of England may reduce interest rates, which are currently set at 5.25%, if inflation continues to fall in the coming months. Therefore, some homebuyers may be tempted to wait and see before making a firm decision. However, if you are thinking of applying for a mortgage, it’s never too early to start considering your options.
Here are some steps to take to prepare you for making your first mortgage application.
How much could you borrow?
It’s important to work out how much you can afford to borrow before you apply, otherwise you run the risk of a rejection that could damage your credit score. This will depend mainly on your income and the size of your deposit. Most lenders will be prepared to lend you three or four times your annual salary, or a joint income if you are applying as a couple.
There are plenty of mortgage affordability calculators available online to help you get a good idea of the amount you can borrow. This will help you to make a realistic application and also act as a guide when it comes to house hunting.
Consider the mortgage term, which is the number of years you will be repaying the loan. This is typically over a 30 or 40 year period, depending on your age. The longer the term, the lower the repayments, but you will end up paying more interest in the long run.
Review your affordability
Once you have completed the calculations, you will have an idea of what your monthly repayments will be. The lender will want to check that you can afford to meet them by looking at your last three payslips, the last three months of your bank statements, and details of any other outgoing payments and financial commitments that you have.
Therefore it is important to make an honest and realistic assessment of your financial situation. Take into account all your regular bills, loan repayments, childcare fees, and all other expenses.
Speak to a mortgage broker
It’s not essential that you use a mortgage broker, but bear in mind that they are likely to have access to a far wider range of products and lenders than you will be able to track down independently. This can lead you to getting the best value for your money, offsetting the cost of the broker’s fees.
The broker will be able to advise you on the different types of mortgage available, and help you decide which products might be most suitable for you. If you have no deposit, you may still be able to secure a 100% mortgage if you have a friend or family member who is willing to act as a guarantor, for example.
There are also shared ownership mortgages to consider, which allow you to purchase a part share in a property and pay rent to a housing association on the other share. Over time, you can step up your share in the mortgage based on what you can afford.
Check your credit report
Your lender is likely to look at your credit report as part of their review of your financial situation. This gives them some insight into how responsible you are at handling money. Some lenders give more weight to credit scores than others, so if you’ve had issues in the past, it is not necessarily the end of the road.
If you do have concerns about your credit score, it’s best to seek out the advice of an experienced mortgage broker who has established relationships with specialist lenders. They will know which lenders are most likely to accept your application, although be prepared to pay a higher interest rate if your credit score is low.
There are steps you can take to improve your credit score. Make sure you are on the electoral roll because this is how lenders will confirm your identity. Set up direct debits to make sure that all your bills are paid on time, and deal with any outstanding debts. Keep an eye on unnecessary spending in the months before you make your mortgage application.
Gather the correct documents
Your mortgage broker will ask for several documents, so have them ready and to hand in advance of your application. You will need proof of your identity, such as a photocard driving licence or a passport; your most recent P60; your last three to six months’ current account bank statements; your last three months’ payslips, and details of any outstanding debts.
If you are self-employed, you are likely to need a statement of your last two or three years of accounts that has been signed off by your accountant.
Apply for a mortgage in principle
A mortgage in principle (MIP) is a provisional agreement from a lender, based on information about your income, outgoings, and level of deposit. It is not evidence that your formal application will be accepted, but it will bring extra credibility to any offers you make on a property in the eyes of the estate agents and sellers.
This can put you at a competitive advantage over other potential buyers. A MIP agreement is usually valid for three months.
Find a property
Now you get to the exciting stage of househunting. Draw up a list of the essential features and desirable features you are looking for, and search within your affordability bracket. Once you have an offer accepted on a suitable property, notify your broker who will make a full mortgage application on your behalf.
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