This week, many people are returning from holiday and the children are going back to school. It is also time to tackle that ‘to do’ list, which may mean looking at your finances. Given that your mortgage is likely to be your biggest outgoing, it makes sense to check that you aren’t paying more than you need to. Or if you are thinking of buying a property, it pays to be aware of the information lenders are looking for.
What every borrower needs to remember now is that while mortgage rates are the lowest they have ever been, criteria is also the strictest we have ever seen.
The cost of a mortgage compares very favourably with the cost of renting, leading many would-be borrowers to expect to easily qualify for a mortgage when there is no difference between the monthly cost compared with the rent they pay. But banks are stress testing affordability at much higher rates than the actual pay rate to ensure you can still afford the mortgage when rates rise.
The same is true of remortgaging: just because a bank lent you £500,000 three years ago does not mean that the same bank or another bank will lend the same amount today. Criteria are much stricter now.
Things you need to know…
– Your credit score is crucial. Carry out an Experian or Equifax check before applying for a mortgage to check it is correct. The main purpose of the credit check is to ensure everything is in order as this is a very important part of the application with any lender. The better the credit check, the more mortgage options will be available to you.
– Think carefully as to how you can evidence your income. If you are self-employed, do you have three years of accounts or three years SA302 (Tax return summary pages)? Some lenders will lend based on less information but it is tougher and you will need to speak to an independent mortgage broker to find out which lenders are more flexible.
– There has been a shift from old-fashioned salary multiples with lenders now working off an affordability model instead. A lender will assess your last three months’ bank statements with a fine toothcomb so check your contractual and discretionary outgoings.
– What level of deposit do you have or equity in your current property? The lower the loan to valuation the better the rate you can get. If you have savings earning little or nothing in interest and are just a few hundred pounds off a lower valuation band, it may be worth putting those in to access a better rate. For example, 60 per cent LTV or 75 per cent LTV.
– You may be able to afford the mortgage now in this low interest environment but can you afford it if rates increase? A mortgage is a long-term commitment.
– Speak to an independent mortgage broker who should be able to search the mortgage market for the most competitive terms based on your requirements/circumstances.
– How old are you and how do you intend to pay off the mortgage? Some lenders will lend more to a 40 year old than a 50-year-old on the same salary as the 40-year-old has more time to pay the mortgage off by retirement age. Again, some lenders are more flexible on this than others so seek advice.
– The bank will be taking security over the property asset. Is there anything about the property a lender may not like? Ex local authority, subsidence, is the property above a commercial premises?
– If you are purchasing a new property do you have enough monies for all the associated costs? I.e valuation, solicitor costs including disbursement and stamp duty etc and then money to furnish the property?