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Getting on the property ladder is a worthwhile goal for many who no longer want to be part of ‘Generation Rent’. Taking on a mortgage is a big financial commitment, however, and your home could be repossessed if you are not able to keep up with the repayments.
The main thing to do before applying for a mortgage is therefore to work out whether you can afford it. The Money Advice Service has a mortgage affordability calculator which you can use to see how much you can borrow.
So, you think you can afford to take the leap to becoming a home-owner; what do you really need to do to secure your first mortgage?
1. Save for a deposit
Have you saved a deposit? Lenders typically require a deposit of between 15 and 30% of the property’s value. If you are a first-time buyer then some options are available that only require a 5% or 10% deposit, but they are few and far between and usually carry higher interest rates or fees.
To break it down, if you are looking at a property worth £200,000 and the mortgage you are interested in has an 85% loan-to-value ratio (LTV), then you will need to provide a deposit of 15% of the property’s value (£30,000).
2. Check your credit score
Do you know your credit score? This is something that lenders will look at in your mortgage application. It is worth asking for a copy of your credit report from the three main credit agencies: TransUnion, Equifax and Experian. This will allow you to see whether you have a good credit score before you apply for a mortgage.
If you happen to have a poor credit score, look at ways to improve it such as paying down any outstanding debt, registering to vote or getting a credit rebuilder card.
Even if you have a good credit score, it is still worth reducing any credit card or loan debts you have before making your mortgage application. These are all factors that lenders will consider in their affordability check.
3. Get your paperwork in order
Do you know what you need to apply for a mortgage? When considering your mortgage application, lenders will look at your income (regular salary and additional income such as benefits/bonuses/freelance income) and your outgoings (regular household bills, loan repayments etc).
For most mortgage applications, you will need to provide:
- Passport or driving licence
- P60 form from your employer
- Bank statements for your current account for the last three to six months
- Payslips for the last three months
If you are self-employed, it is a little harder. It is more likely you will need to provide proof of around 18 months to a full two years of business income, including tax returns.
4. Find a mortgage
Do you know what mortgage you want? There are lots of different mortgage products available, so try to find the one that is right for your needs. If you are a first-time buyer, maybe consider a specific first-time buyer mortgage, which will require a lower deposit. The Government also offers Help to Buy schemes which could make buying your first property more achievable.
Here are some other things to look at when considering which mortgage to apply for:
Type – There are many different types of mortgage, but the ones you are most likely to come across on the best buy tables are fixed-rate, tracker or discount. A fixed rate mortgage gives you a set interest rate for the term of the mortgage. A tracker mortgage tracks the Bank of England base rate; so, for example, your rate will be 1.99% plus whatever the base rate is. A discount mortgage has a variable rate, where your mortgage rate is set at a certain amount below your lender’s standard variable rate (SVR).
Fee – What is the fee attached to the mortgage? This is typically around £1,000/£1,500.
Term – How long is the mortgage term, i.e. how long will you have to pay back the mortgage?
Early repayment charge – Does the mortgage charge you for overpayment, paying off your balance early or switching mortgage before the end of the term?
If you need help choosing the right mortgage, you can use an independent financial adviser or a mortgage broker. Alternatively, you can compare mortgage products using financial comparison sites.
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