Posted on 16 May 2018 by
When looking for a property you will need to know how much you can borrow and how much it will cost both in fees and in monthly payments. Selecting and engaging with an independent mortgage broker will help you budget and prepare for this significant next step. Below are some top tips for those about to embark on their first property purchase journey.
Before you offer on any property it is a good idea to speak to an independent mortgage broker about six months in advance. Your broker will be able to apply to a lender for an ‘agreement in principle’. This is where your broker inputs all your information to allow a lender to perform initial checks to confirm if you are likely to be accepted for a mortgage and the maximum amount they may be prepared to offer. This can be extremely useful, as once you add your deposit on to this amount you will be able to work out what your maximum purchase price will be.
It can also help as your broker may be able to highlight some spending patterns that could be limiting your maximum borrowing amount. Six months could give you time to change those habits to potentially increase your maximum borrowing amount prior to offering on a property. It also might highlight any genuine problems for you to address in the future.
Another benefit of having a mortgage agreement in principle is that you can use it as a negotiating tool with estate agents. An agreement letter obtained by your broker from the lender satisfies two things most estate agents like to see. First it shows that you are prepared and serious as you have already got your lending part-approved. Second it will show that the amount you are looking to borrow (plus your deposit) is sufficient to afford the property. There is a potential downside to this in that by showing an estate agent the amount you could borrow might influence the negotiation process.
When you have agreed a price on a property you do not have to use the lender from which you obtained your decision in principle. This could be for a variety of reasons, but your broker should go back to the open market to look for the best deal for you and your needs at the time. But if the original lender has the best option for you then the application is already well underway.
Lastly, engaging your own independent mortgage broker means you do not have to use the in-house adviser in the estate agents. There is no legal requirement for you to use anyone but having a third party outside the estate agents or solicitors may provide you with another perspective you might find useful.
You are going to need a solicitor as well as a mortgage broker. Personal recommendations are a great way to find out which companies have provided a good service for other people - so make sure to ask your friends, family and colleagues about their experiences.
The estate agent (or developer if you are buying a new build) will need your solicitor’s information, so it is advised to decide which solicitor you will be using before you start looking for your first home. Having this information ready from the outset also shows an estate agent that you are prepared and serious about securing the property. It will save you time once you have found your perfect home.
Should you not have any recommendations, you can ask your broker. Mortgage consultants deal with solicitors all the time and may be able to make some recommendations to you.
Most lenders verify your identity electronically nowadays. Being on the electoral roll counts a fair bit towards identifying who you are and your ‘credit score.’ This may simplify the process of providing proof of address and ID to your mortgage lender and could prevent you from having to go through additional identity checks before your application can progress.
Being on the electoral roll can also link your current address to previous addresses and lenders like to be able to see your payment history going back several years. Not being on the electoral roll can be viewed as a negative point by lenders – even if the reason is that you don’t vote.
It is likely that a lender will want to see your bank statements from the last 3 months, but sometimes for longer. You will want to make sure that you haven’t exceeded your overdrafts or had any of your payments bounce back in this timeframe. The lender will also be looking at who you are paying, so you don’t want to be spending on things that lenders will disapprove of.
You will need to carefully consider whether you want to sign up to Open Banking as it allows lenders to see a longer history into your account and with more detail. However, for those with a good payment history Open Banking could help your application.
It may seem strange to suggest that borrowing money will help prove to lenders that you can afford a property, but this is an important tip due to the way many of the biggest lenders assess mortgage applications. They use a process called credit scoring to help assess your ability to responsibly handle credit. This essentially works on a basis that assumes you cannot handle credit until you prove otherwise. Regularly using and repaying a credit card is a great way to boost your credit score and demonstrate to lenders that you can handle credit.
We recommend if you don’t already have a credit card that you get one, use it for some small, normal purchases and set up a direct debit to pay the balance in full each month. The credit card’s interest rate won’t matter as by paying in full each month means you won’t be incurring interest or any additional charges. Don’t forget that you will need to make some purchases on the credit card each month for it to influence your credit rating. Do not ‘run it up’ so that you cannot keep up payments on it and bear in mind that regular commitments will likely be deducted from net monthly income for affordability purposes.
Following on from the previous tip, the current credit scoring system means that with all other factors being equal, a person who saves £600 per month and has no credit cards or loans will have a lower credit score than someone who saves nothing but has a couple of credit cards or a loan (if all payments have been made on time). Not every lender credit scores that way so the saver mentioned above is likely to still be able to get a mortgage, but they may be left with a smaller pool of lenders to choose from.
Your credit score also takes into account how ‘stable’ your lifestyle is. Your lifestyle is deemed more stable by lenders the longer you have been with the same employer, lived at your current address and have had your current bank account. A personal loan or other regular payments, even a mobile phone contract, also work to improve your credit score by proving that you are able to maintain regular outgoing payments.
The bigger your initial deposit on a property, the lower the mortgage rate you are likely to qualify for and the lower the minimum credit score you may need to be accepted for the mortgage. There is an especially large jump in interest rates for borrowers with lower deposits like 5% or 10%. Therefore, if you think you could afford to pay a slightly higher deposit of at least 10% of the overall property value, then it could be very beneficial when it comes to securing a cheaper rate and therefore lower payments.
If you can only find a 5% deposit and are happy to consider a new build property, the Government’s Help to Buy Equity Share second charge scheme could offer you good value. This scheme gives you up to a 20% equity loan from the Government (40% in London boroughs) and a normal 75% Loan to Value (LTV) mortgage from a bank or building society. The Government’s equity loan is interest free for the first 5 years after which interest becomes payable, but only initially at 1.75%. This rate will change in line with UK inflation and payments are only required on an interest only rather than repayment basis.
In exchange for using this scheme the Government takes 20% of any profit on the sale of the property and, should it fall in value, they will also share pro rata in the loss. As a result of only needing a 75% LTV mortgage on this scheme, you will have a much lower interest rate compared to a normal 95% mortgage.
First time buyers with a more limited budget could also look at standard shared ownership or other types of shared equity schemes. These are predominantly available via Housing Associations and there are usually restrictions on the maximum income of first time buyers able to qualify.
Shared Ownership is a similar scheme where you can buy typically between 25% and 75% of a property with the housing association owning the remainder. They differ from Shared Equity schemes in that the housing associations do not own an actual share of the equity and therefore the amount you owe does not change over time. Instead you pay rent to the housing association in proportion to what they paid originally (usually 3% or less of the value of the share being rented).
You can also increase the share being bought should you be able to afford it later down the line, known as ‘staircasing.’ The implications of all these schemes need to be considered at outset as although similar they work very differently, especially as time goes by.
Whether you are a first-time buyer just starting to look at your options, or you’re a parent guiding your child through purchasing their first home, it’s extremely important to know all that is available to you. That’s why talking to an independent mortgage broker like ourselves will allow you access to a mortgage deal that suits your requirements, lifestyle and affordability.
For more information and advice on your options, talk to one of our mortgage experts on 0344 346 3672 or submit an enquiry form here.
The blog postings on this site solely reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and John Charcol will not accept liability for them.