Money Means guides are brought to you by FSCS, the people who protect your money from £1 up to £85,000 in UK banks, building societies and credit unions. Find out more.
Applying for a mortgage can be a daunting prospect. After all - it’s the biggest debt you are likely to ever take on.
Here’s what you need to know:
1. Credit record- how to get a squeaky clean file
It’s important to make sure your credit file will be squeaky clean in advance of making a mortgage application. This is because it might take time to get it up to scratch. If your report is less than perfect, it could cost you the mortgage you want.
Those who have borrowed money in the past and showed they can make repayments on time have more chance of making a successful application.
But if you have a history of missed or skipped repayments, you need to demonstrate that you can be trusted to repay a mortgage.
You may need to take out a credit card, spend some money on it and pay it off each month to illustrate that you can do this sensibly to build up a decent credit score.
Even if you’re sure you’ve never skipped a payment - check your file. Many have mistakes or a forgotten few pounds owed on an old credit card. You could also have a blemish from owing just a few pence on an old mobile phone contract.
The £2 reports are not always well signposted on homepages – but they are there somewhere in smaller print, usually towards the bottom of the page.
2. Rein in your spending
Lenders will go through around six months’ worth of statements and three months of payslips to assess affordability. So you might want to think about reining in your spending - you might be doing this anyway while you save for a deposit if you’re a first time buyer.
Set aside a few hours to go through your finances. Print off your recent bank statements and spend some time going through them to work out what is paid in and what comes out. Start with what comes in each month from a salary, and what goes out every month. Look at your spending on direct debits and standing orders – is there something lurking that you had forgotten about? Hanging onto gym memberships is a common trend among those who only manage to go a couple of times a year. You might even spot a magazine subscription you have been meaning to cancel.
3. Affordability is key
The actual amount will now depend on your affordability which is calculated by lenders, looking at existing outgoings and any other debts and credit agreements. A student loan or car finance for example, would reduce the amount you can borrow. As will a credit card balance. If you do have credit card debt, make sure you are paying as little interest as possible – preferably none! Check which cards are offering the best 0% balance transfer deals and switch the debt so you are not paying back interest on top of the money you borrowed.
School fees and child maintenance payments can also be included as “debt” so you may find you can borrow less than you think.
4. Get paperwork ready
It makes sense to get your paperwork prepared in advance so you don’t waste time. Many lenders won't accept printed internet bank statements so you may need your bank to print out or send you original copies. Get your payslips out of files, and your P60 tax form showing income and tax paid from each tax year. You will also need photo ID so get a copy of your passport, and for proof of address dig out recent utility bills.
5. Get help or going it alone?
Using a broker means they do the legwork for you. They can help you work out how much you can borrow so that you know what price bracket you can search for properties in. They will also help you decipher the right type of mortgage for you. If you are self-employed or have any special circumstances they can help find more flexible lenders for your situation.
There are many fee-free brokers who will get paid commission from the lender, so you pay nothing for their services. Just watch out for others that charge hefty fees. Ask at the outset what their fees cost and remember, you can try and negotiate on their fee if you have the courage to (politely) mention you will take your business elsewhere unless they can price match a cheaper broker you have found.
Alternatively you can pick a mortgage yourself by searching online. But remember – it’s not just about the interest rate. Factor in fees and other costs and work out the overall cost of the loan. Comparison sites like uSwitch (www.uswitch.com/mortgages/) will be a great help. But they’re no substitute for professional advice.
And by going it alone, you won’t have access to FCA complaints and compensation procedures should there be any problems with your choice of mortgage.