Buying a home is probably the most important and the most expensive purchase you’ll ever make. Once you’ve managed to save up a deposit, you’ll need to secure a mortgage, and the deal you go with can make thousands of pounds' worth of difference to your long-term costs.
With the cost of living continuing to rise and interest rates increasing, securing a good mortgage deal is becoming more difficult, but there are still deals to be had. Mortgages can differ in many ways, so it can be tricky to know what to look for but we've compiled this handy guide to help you find and secure the best mortgage for you.
Get your finances in check
Before you start looking for a mortgage, there are steps you should take to get your finances in check and ensure you'll be offered the best possible rates from lenders, as this could save you a significant amount of money both monthly and long-term.
Save, save, save
One of the biggest factors lenders take into account is the loan-to-value ratio (LTV), which refers to the size of the loan relative to the property’s total value.
For example, if the property you want to buy is worth £200,000 and you have a £40,000 deposit, you'll need to borrow the remaining 80% from the lender.
The more you can save for a deposit and the lower the LTV, the less risk you'll pose for the lender. This means you'll be more likely to be approved and be offered better interest rates and terms.
Cut back on spending
When you apply for a mortgage, lenders may ask to see your latest three (to six) months of bank statements. They'll want to check your income matches what's on your payslips and also examine your recent spending. It's worth cutting back in the months before you apply, as this will show the lender you can comfortably afford the repayments. It's also wise to avoid online gambling as this could be a red flag to some lenders.
Check your credit report
Lenders will search your credit report to check your repayment history and make sure you've got the financial discipline required to pay back your mortgage. Your report lists details from any any accounts you've had open over the past six years, including credit cards, overdrafts and loans as well as electoral roll information, address history and more.
There are three main credit reference agencies in the UK: Experian, Equifax and Transunion. Check each of them before applying as you don't know which one(s) the lender will check. You should make sure all the information held is correct and flag any errors.
Boost your credit score
Having a poor credit history could hinder your chances of getting a mortgage, so it's worth taking any steps you can to improve your credit score before applying. By boosting your score, you’re more likely to be approved and offered a lower interest rate by lenders.
Here are some steps you can take in the months leading up to your application:
- Register to vote
- Keep up to date with payments
- Avoid new credit applications
Top tip: While a poor credit score could go against you, so could having little to no credit history. A credit score is all about predicting your future behaviour, so if you haven’t borrowed before, it's difficult for a lender to judge how likely you are to meet your repayments. If this applies, you should spend time building a reliable history such as with a credit building credit card, but this will take time.
Don't make any big changes
It's best not to make any big changes in the months before you apply, as you don’t want to do anything that might jeopardise your standing with lenders. It's probably not the best time to change careers or apply for any additional credit. Any big changes could increase your risk factor to lenders resulting in a higher interest rate or not being approved at all.
Reduce outstanding debt
If you can, you should try to reduce any outstanding debts before applying for a mortgage. While this could improve your credit score, it will also boost your affordability which is a big factor for potential mortgage lenders.
Finding the best deal
Work out what you can afford
Once you've saved a deposit and taken all the steps to give yourself the best chance of approval, it's almost time to start house hunting. But before you start searching for your dream home, it's good to get an idea of how much you can afford to borrow.
Take advantage of free online mortgage calculators to find out how much you might be able to borrow based on your income and what your repayments would be at different interest rates.
Use a mortgage broker
Mortgages can differ in many ways so it can be really tricky comparing deals, and this is why you should speak to a mortgage broker. Brokers will know key details about lenders' criteria, so they'll be able to advise where you're most likely to be approved, and help you get the best deal for your circumstances. It's best to use an independent broker who can look at every mortgage on the market, as opposed to some who only work with a select group of lenders.
Some mortgages are only available to those applying through a broker, so you might also be able to access a better range of deals than you would applying directly. Using a broker can make the whole process much easier and save you a lot of time and hassle, as well as making sure you secure the best deal.
Get an agreement in principle
Once you've compared interest rates, fees and found a deal that ticks all the right boxes, you can apply for a mortgage in principle with your chosen lender. This is a conditional offer saying you may be accepted, based on a quick check of your income and credit file.
Don't worry though, this won't tie you in to borrowing from that lender if you manage to find a better deal later on. But, you'll get a good idea of what you can lend and show potential sellers and estate agents you're in a good position to buy. Too many of these checks in a short space of time could harm your credit rating if the lender does a credit check and this could damage your application down the line, so it's best to only apply for an AIP with a lender you're seriously thinking of going with.
Fill out the application form correctly
Whether you get a broker to help you or decide to go it alone, you'll need to provide accurate information on your application. This may sound obvious, but even the smallest error could delay the process or even impact your approval chances.
Take your time and fill in all the details accurately. Don't overstate your income by rounding up (give exact figures) and be honest about your typical spending habits, as well as declaring all debts.
Get all relevant paperwork together
It's a good idea to get all your paperwork together in advance, as this will speed things up and could reduce the chance of your application being reviewed by more people. Requirements may vary by lender but you should expect to be asked for:
- ID/proof of address
- at least three months' bank statements
- at least three months' payslips
- your latest P60 tax form
- proof of deposit
As well as securing a mortgage, there are lots of other things to sort out when buying a property. There is a whole range of extra expenses to think about too, from conveyancing fees to stamp duty, but hopefully it will all be worth it once you get the keys!
You can read our comprehensive guide to save money when buying a home for more tips and advice along the way, from making an offer to completion day.
Have you recently found a great mortgage deal you think we should know about? Or have you got any more hints and tips for home buyers? Let us know over on Facebook, we'd love to hear!
