A Guide to Mortgages
Written by Jen Finnistere, inhouse mortgage specialist at AAG Wealth Management
The Amount you can borrow
The amount you can borrow is normally calculated on affordability. Each lender has their own affordability calculation. However, a rough indication is about 4.49 x basic salary income (although there are a few lenders that will lend 5 x income). The items that are taken into consideration when assessing affordability are income (basic salary and bonus), expenditure, commitments, age, the term of the mortgage, lenders credit score (to name a few)
Factors to consider: Credit history
What is a credit score?
Your credit score is used by banks, building societies and other lenders to decide whether they will give you a loan, credit card, overdraft, mortgage or other type of credit. This is a review of how good you are at paying your debts and your history of borrowing.
Whilst there are several; credit agencies, the two main credit reference agencies that create credit reports that can be used by lenders to find out more about your credit history. Lenders may use one or more than one of these to help make their lending decisions.
The credit reference agencies are:
You could also use “checkmyfile” as this shows data from 3 credit agencies.
These organisations hold information about consumers and their borrowing behaviours. Each time you apply for credit or take out a new credit product this will be logged on your credit file held by these organisations. Whenever you complete an application form for credit, you will also agree to the lender accessing your credit file held with at least one of these.
These credit reference agencies provide their services to a range of credit check companies that you can use to find out your credit score.
Things that can improve you credit history are:
Get on the Electoral Roll
Getting on the electoral roll will improve your chances of being accepted for credit. This is because prospective lenders and credit reference agencies use this to check you are who you say you are, and you live where you say you live. Ensure your credit record shows correct address details. Living at the same address, being employed in the same job (with the same employer) and having the same bank account for a reasonable period will also help
Close unused credit cards, store cards, direct debit, mobile contracts and Dormant bank accounts
Lenders may consider the amount of credit you have access to, as well as the amount of debt you owe. Close all credit accounts such as credit cards, store cards, mobile contracts and accounts that you do not use or need anymore. Cutting up cards is not enough – you need to physically contact the provider and close the account! They will ask you why because they do not want you to leave, so be prepared to stick to your guns and close it down.
Build your credit history with a credit card
If you have never had credit before, it is difficult for a lender to assess you. Consider taking out credit card, making a couple of purchases on it each month and then repaying the balance in full at the end with a direct debit to build a good credit history. This will show that you can responsibly manage credit. Set up a direct debit with the provider to pay the minimum payment or balance each month full
Do not miss or make late repayments
Missed and late payments can stay on your credit file for up to six years. If you’ve made a late payment due to circumstances beyond your control (i.e. your direct debit wasn’t set up in time), so long as you made the payment promptly when you noticed, talk to your credit provider and see if you can get this black mark removed. This also applies to late payments for utility bills like gas or electricity.
Pay off your debts
Pay off more than just the minimum payment. This signifies good behaviour to a prospective lender. To be managing your debt well, ensure that you are making headway into repaying what you have borrowed.
Space out your credit applications
Credit reference agencies do not get told if you are rejected for credit, but a note is made every time a credit search is made by a lender. Do not use a scattergun approach when applying for credit. The more credit searches carried out in a short space of time, the less likely you are to be accepted for credit. Space out credit applications and, if possible, try to find out whether you are likely to be accepted before applying. Do not apply for products unless you really need them.
Disassociate yourself from your ex-financial partner
When you take out a joint mortgage or joint bank account, you become “financially linked” to the person you have taken it out with. If they have a bad credit rating, it could impact yours. If you have split up with your partner, husband or wife and/or the joint financial product you have taken out is no longer between you both, inform the credit reference agencies of your disassociation. If not, the other person’s financial dealings could still have an impact on your credit score.
Mortgage lenders normally ask for the latest three months bank statements
Mortgage lenders who want to see your bank statements will use the information to help them assess whether you can afford the mortgage you are applying for.
They will review your bank statements to confirm your income and regular monthly outgoings with a view to how your financial commitments will affect your ability to repay your monthly mortgage payments.
Overdrafts – if you have an overdraft, if possible try not to keep using your overdraft, as this shows the lender you are not able to manage your current financial circumstances, however, if you do use your overdraft ensure you keep within your overdraft limit.
Payslips– Mortgage lenders normally ask for latest three months payslips. When looking at payslips, the lender is looking at your deductions from the payslips i.e. student loans, season ticket loans, pension contributions (not all lenders deduct pension contributions).
Bonus – lenders want to see a two-year bonus history and will ask for the following
- Last two payslips showing bonus
- Latest two years P60
Please note that due to the current economic climate not all lenders are taking bonus into consideration
The Different Types of Mortgages
The two main types of mortgages are Fixed rate and Tracker rates
Tracker rate: Base rate tracker mortgages are a type of mortgage product available in the United Kingdom. They have an interest rate that is tied to the Bank of England base rate, plus an additional margin. Base rate tracker mortgages offer incentives such as potentially low interest. However, caution should be exercised as they are susceptible to rate increases.
Fixed rate: With a fixed rate mortgage the amount you repay the lender each month will be fixed for a specified period. Your monthly repayments will remain the same regardless of any changes to the Bank of England Base rate.
Once the type of mortgage has been decided, we will then look at the method of repayment. This can be Capital and Interest or Interest only or a combination of both.
Repayment (also known as Capital and Interest): Repayment mortgages are also known as ‘capital and interest’ mortgages. As the name suggests, you gradually pay off the amount you borrowed over the term of the loan (the ‘capital’), together with interest. You make one payment each month to your lender. Then as long as you keep up your monthly payments the mortgage will be repaid at the end of the term of the mortgage.
Interest Only: With interest-only schemes you only pay back the mortgage interest during its term. Your payments to your lender only go towards repaying the interest charged – you do not actually repay any of the money you originally borrowed (the capital).
You should also make other arrangements for paying back the capital. For example, you could pay a separate monthly amount into an investment such as a stocks and shares, ISA. At the end of the term of the mortgage, the amount you invest plus the interest earned should hopefully be enough to pay of the amount you initially borrowed.
There are very few lenders currently offering this type of mortgage and the ones that do have very specific criteria.
What to consider when looking at properties
- New build properties – some lenders may not lend up to 90% on new build properties
- High rise developments – some lenders may restrict the number of floors that they will allow i.e. no more than 7 floors
- Studio flats – not all lenders will accept Studio flats and the ones that do have specific criteria
- If buying a flat, ask the estate agent
o Remaining term of the lease. The longer the lease the better.
o How much are the annual ground rent and service charge?
Your home may be repossessed if you do not keep up repayments on your mortgage.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may not get back less than the amount invested. The levels and bases of taxation and reliefs from taxation can change at any time and are subject to individual circumstances.
Costs and when to expect them
Type of cost
When payment is due
|Valuation fee||At the start of the application|
|Lender’s Booking fee (if applicable)||At the start of the application and is not refundable if the mortgage does not proceed|
|Lender’s Arrangement/Product fee (if applicable)||Added to the mortgage|
|Deposit||10% is payable on exchange of contracts. It is possible to pay a smaller deposit, but this has to be negotiated in advance.
The remaining deposit is due prior to completion
|Stamp Duty||Prior to completion – if you are a first-time buyer, there will be no stamp duty payable for purchase prices up to £300,000 and if between £300,000 and £500,000 the stamp duty is 5%|
|Legal fees||Prior to completion|
Expecting the unexpected.
A good rule of thumb to give yourself a solid financial cushion is to have three – six months’ essential outgoings available in an instant access savings account. So, if you lose your job, for example, it will help buy you three -six months to find a new one.
But, remember any amount saved will help you if you have to pay for something you were not expecting.