Is one of your dreams buying a property? In this post I talk about 3 important things to consider to get that mortgage offer in the UK*.
All 3 of them need time to unfold, therefore, if you plan on buying, give yourself some lead time and be persistent, it pays off! I suggest 6 months minimum!
The 3 pillars of a successful mortgage application are: Credit Score, Affordabilty and Deposit:
It all comes down to financial credibility. Banks want their money back. Every penny. They don’t like risk (and you will pay more if you are more of a risk to them). They will look at your financial past (credit score), your present situation and lifestyle (affordability), and if you saved enough to pay a deposit. The better you behaved in the past and got your spendings under control ,the more likely it is that you can lend that massive chunk of money.
You need at least 10% of the property price as down payment, meaning that if the property price is £200,000, you need a minimum of £20,000 as deposit. The more deposit, the better.
This has 2 reasons:
Firstly you own a bigger part of the property and need to lend less (smaller debt).
Secondly, the higher the deposit and the less you have to lend you are likely to get a lower interest rate offered, meaning the mortgage is less expensive. Why? Imagine you want to buy a £200,000 property. If you have a deposit of £50,000, the bank has to lend you less money. You are a smaller risk for the bank, therefore they will offer you a lower interest rate.
If you find it difficult to save up a deposit, look into help to buy, it makes it possible to buy a home with just 5% deposit (£10,000 in the example above).
Mortgage costs: Don’t forget you have to pay the solicitor, stamp duty (if applicable), pay for a house move. These have to be considered when you start saving.
Every lender looks for a different credit profile, therefore it is a myth that only people with a high score can get a mortgage. Higher is safer though, as it means you are more trustworthy to pay back your loan, which in turn has a positive impact on interest rate. High credit score = trustworthy, smaller risk for the bank.
Once you get to the point of talking to a mortgage adviser , they will be able choose the best lender for you, based on your profile.
If you don’t know your credit score, go on Experian. It is the most commonly credit score used. It’s free to find out the score.
If your credit score is low, there are things you can do to improve it. But this again needs time, so starting to think about it early will help you. Even if you paid off all your debts overnight, the credit score takes a few weeks to reflect this.
Things you can do will involve dealing with old debts, being on the electoral roll, having one (ideally not more) credit card which should be used but paid off fully every month., having a stable relationship with your bank (do not switch bank accounts every couple of years), and many more.
Experian will help you figure out tailored actions for you. Tp access this access you have to pay for, but it is worth the cost, after a month you can cancel again and work on the action points.
Can you afford the monthly repayments given your spending habits, debts, dependants (i.e. children)?
At least 6 months before applying for your mortgage, go frugal. As frugal as you can be.
The lower you monthly bills are, the more likely is that tha bank checks off this point.
For example. If your income is £2,500 and your monthly expenses (excluding the anticipated mortgage) comes to £1,450. Mortgage repayments will be £1,000. That means you have £50 leftover. The bank might assume you cannot afford the repayments, given your budget is so tight.
Going frugal will also help saving the deposit, as you save a lot of money. What do I mean wit going frugal? Less take aways or dinners, cancel unnecessary subscriptions, buy less clothes (or buy second hand) and maybe don’t choose this time for 6 expensive weekend trips.
Going back to the example above, going frugal might cut down your expenses to £900, meaning you have £600 leftover and you can easily afford the mortgage repayments.
Sometimes the lender will want to see your bank statements for the last 6 months, therefore it’s good to make it “presentable” by being frugal.
I will write about the 3 blocks more in detail, but this gives you an overview and why it is so important to plan ahead.
With good planning, you can tick off all the boxes.
I came to this country in 2015 with no savings and a nonexistent credit score, after 3 years, we bought our flat! The property cost £200,000, we had £20,000 deposit, I (the immigrant) managed to have a credit score of 985 and LP**, who started off with very poor (under 500) ended up having 960. Took us 3 years but we got there!
*In other countries the rules might be slightly different. But the basic principles will be similar.