Open a newspaper or perform a 10-minute search for homeowners getting their first mortgage, and you’d be forgiven for sometimes thinking that you might as well not bother. Horror stories of lenders’ requirements for huge deposits and flawless credit histories are common.
Firstly, live within your means, save up and don’t go mad with loans and credit cards. Ideally that credit history needs to be spotless, and at the same time it’s handy to show you can repay borrowings so it’s worth using your credit card sporadically, and paying it off in full each month. Banks and building societies will look for late payments and even worse, County Court Judgements, which stay on your credit file for six years.
Get into the habit of paying debts early and intelligently, and keep an eye on your credit rating – there are many websites where you can check this. In April 2014 the Mortgage Market Review came into force in a bid to stop some of the previous irresponsible lending which saw mortgages being dished out to people who could not afford them. There are now tougher rules in force including the ‘stress test’, which will look at how an applicant spends their money, and in particular how they would handle their finances if their situation changed, or if interest rates rose.
Interviews with lenders can now take up to two to three hours, so make sure you are prepared – you may be asked about childcare, travel costs, and even grocery spending. So be realistic, and if possible plan towards the interview in advance by cutting wastage in your finances. Click here to use Money Advice Service’s mortgage calculator, and see where you can tighten up. It will also show you whether that three-bedroom house in London is viable, or if you should downscale your ambition, at least temporarily. Don’t be among those who miss out – this piece from The Telegraph shows how the number of people taking out a mortgage dropped 5.5% in a month after the MMR was introduced.
Let’s say that you wish to buy a house in a year or so. When you are researching your finances, you may find out that a few simple tweaks can free up more cash than you expected. If that’s the case, why not put some money aside for your deposit? The difference in the interest rate between a 5% deposit and a 10% deposit could be massive, and saving more will open up more options when it comes to choosing a mortgage product. In addition, it will show lenders that you planned and can plan – producing a bank statement with a year of solid, well-controlled savings will be beneficial for the MMR interview.
Finally, take a look at the Help to Buy scheme, which has been designed by the Government to try to close the gap in interest rates between those offered for small deposits and those with larger deposits. It can help boost small deposits by offering a five-year loan (interest free) of up to 20 per cent of a property’s value as long as there is a deposit of at least 5%. The government also offers guarantees against losses to the lenders, of up to 20% of the property’s value.
With forward planning, research, wise spending and a little patience, you might not just find any mortgage, but an ideal one. The more you bring to the lender’s table, the better your chances of success.