Do you know the biggest mortgage mistakes? You should know these before owning a home!
Owning a home is a big deal, literally. It will be one of the biggest commitments you’ll ever make in life. While looking for a home can be exciting, it can also be a little overwhelming.
With so many homes to choose from, hundreds of deals and a large market with so many lenders, it’s common for people to buy a home they actually can’t afford.
When the time comes for you to take your first step on to the property ladder, it’s important you understand how the process works. We’ve put together the essential things to know when getting a mortgage.
FIRST, THE BASICS
To put simply, a mortgage is a long term loan which you use to cover the cost of a property.
When applying for a mortgage, you will need to offer up a deposit. If your lender accepts your mortgage application, they will offer up the rest which you will pay back over an agreed time. Hypothetically speaking, if you offer up a deposit worth 20 per cent of the property’s value, the mortgage will make up the other 80 per cent. This means you’re borrowing at 80 per cent loan-to-value, which you’ll need to pay back.
The payments you make to the lender will be made monthly. The lender takes into account the cost of the mortgage and the interest rate being charged, which they will make you pay over a set period of time – normally 25 to 30 years.
There are different types of mortgages. The rate of interest your lender charges depends on the amount you wish to borrow against the property’s value – this is known as loan-to-value.
Lenders expect you to keep up with your monthly repayments, otherwise you risk losing your home to repossession. The lender can seize your home and sell it to retrieve their money, so paying your bills on time every month is crucial.
TYPES OF MORTGAGES
While majority of mortgages have the same repayment period, there’s a good chance the rate of interest you’re charged will change throughout that time.
Depending on what mortgage you get, it will normally start with a 2 or 5 year period where the rate is fixed, meaning your payments will stay the same. When the term ends, your mortgage will switch to what is known as a Standard Variable Rate. This means the lender can increase or decrease the rate at any point, no matter what the base rate is.
The standard variable rate – or SVR – will be higher than the original fixed rate you were previously paying. So, it’s advised you shop around for a remortgage when you reach the end of your term.
A fixed rate mortgage offers a set rate over a specific period of time. This means your payments remain the same throughout the duration of the term.
With a fixed rate, you’ll know how much you’ll be paying every month. When the deal is up, you can switch to a standard variable rate or find a new mortgage deal.
WHAT TO CONSIDER:
Can you afford it?
Before applying for a mortgage, you need to know if you can afford to cover the purchase of the property, plus pay other costs and fees. A lender won’t offer you the desired mortgage if you don’t earn enough income. You can work out your debt-to-come ratio to figure out how much you can afford on a monthly basis.
Proof of income
Lenders will need to see proof of what you earn to know whether or not you can afford a mortgage. You’ll likely be asked to produce 3 months’ worth of banks statements and payslips, to show what you have coming in and going out. If you’re self-employed, you’ll need to provide an SA302 form relating to the last 3 years from HMRC or full accounts from the last 3 years.
Your down payment
The more you put down for your deposit, the lower your loan will be. Plus, you’re more likely to be approved, especially if you’re credit score isn’t too great.
You will also have to ensure you have enough to cover other costs and fees on top of your down payment, so avoid making large purchases.
When applying for a mortgage, the last thing a lender wants to see is that you currently owe money to other debtors. Working to reduce your debt will show the lender you can manage your money responsibly, and your mortgage application will more likely get accepted.
If you’re applying for a mortgage, don’t apply for new credit cards or close current credit accounts as this will make the lender suspicious.
Your credit report matters
Studies show that 40% of credit reports contain mistakes, which can determine how much interest your lender will charge. Errors can also cause mortgage applications to be rejected, so ensure your credit report is clear of any mistakes.
Credit Score also matters
Your credit report is the first piece of information a lender will look into when deciding to lend to you. If you’re credit score is low, your chances of getting accepted will also be low.
Don’t switch jobs
Lenders want to see that you’ve been with a certain employer for a good length of time. If you want to switch jobs, wait until your mortgage has been approved and is in place
Studies show that hundreds of people attempt to search for a lender themselves when they haven’t a clue if they’re eligible, which is why most get rejected. Getting help from a mortgage broker would be most beneficial to you. They can search the entire market and take you through the application process step by step so you’re not doing it alone.