Buying a home is one of the largest purchases you’re likely to make, so having a clear understanding of how much money you can afford to spend is crucial. A mortgage is a loan from a financial lender to help you buy a property and it’s paid back over a set period of time – on average over 25 years.
Very few people have the finances to but a house out right. Secured against the value of your home until the amount is paid off and you own the property outright, a mortgage is the most common way to finance a house purchase.
1. Assess your affordability
Before approaching a broker or looking at properties, you need to calculate what you can really afford. Work out your monthly income and outgoings, including the cost of running a home, such as bills, council tax, maintenance costs, insurance, and regular payments like grocery shopping and transport costs. This will allow you to see the amount of disposable income you have and how much of this you can put towards paying off a mortgage.
Don’t be tempted to stretch yourself – you don’t want to end up in debt or struggling to make repayments. Also, account for any future planned changes that could impact your income, such as taking a career break or starting a family.
2. Prepare to explain your spends
When you’re ready to apply, be aware that lenders will want to know great detail about what you spend and why. You’ll need to provide proof of income and expenditure, plus declare if you have any debts, such as loans, overdrafts or credit cards. A broker may ask for information about your household bills, personal expenditure and also for proof of a deposit and information on your employment status.
It’s a good idea to check your credit score and make improvements to your financial status prior to approaching a potential lender – try Experian or ClearScore. This is also a great opportunity to rectify any errors within your credit report, or offer an explanation for any misgivings.
Since the financial crisis, the questions lenders ask have become increasingly extensive, as they have to make sure that mortgages are offered to those who can afford it. When you’re confident your finances are in order, you should then seek advice from a qualified broker.
Did you know?
Checking a broker is regulated by the Financial Conduct Authority means you have
the right to appeal for compensation through the Financial Ombudsman should anything go wrong with your application or mortgage.
3. Get advice
Mortgages are offered through a bank or building society, but a mortgage broker will help you choose a preferred lender based on your circumstances and what you can afford, and advise on the best type of mortgage, comparing the deals available on your behalf. Find a broker locally or via websites, such as Vouchedfor.co.uk or Unbiased.co.uk.
All financial advisers must be regulated by the Financial Conduct Authority (FCA), so always ask if a broker is fully qualified and check this on the FCA register online. Ask what they charge, if you can read previous client reviews, and if they can find you a mortgage from all UK lenders.
Some advisers are restricted to a small number of lenders’ mortgages, while others deal with the whole market, including direct deals, so decide which is right for your circumstances. When looking for a broker, seek recommendations from friends and family.
4. Know mortgage types
The type of mortgage you can apply for depends on whether you are able to pay off the amount borrowed and the interest. There are two main types: fixed-rate and variable.
- A fixed-rate ensures your monthly repayments will stay the same for a set time.
- A variable rate could fluctuate in line with the Bank of England base rate.
Others include discount, whereby you’ll receive a percentage cut off the standard variable rate (SVR) of interest; tracker, which moves in line with the base rate, plus a few per cent added by the lender; capped rate, where a variable interest is limited to a cap; and offset, that links your savings to your mortgage and you pay interest on the difference.
The eligibility criteria will depend on the lender and the type of mortgage. It can also be impacted by your income, age, size of your deposit.
Money expert at the Money Advice Service
5. Be aware of additional costs
Don’t forget to include broker and solicitor fees, valuation costs, Stamp Duty and costs for any surveys needed on the property when working out your affordability. Brokers fees will vary, but expect to pay £200-500.
6. Check your deposit amount
You cannot get a mortgage without a deposit. The more deposit you have, the lower your interest rate is likely to be as the Loan to Value (LTV) is lower. For example, with a 10 per cent deposit of £20,000 on a £200,000 property, the LTV is the remaining 90 per cent, or £180,000. The cheapest rates are usually available for buyers with a 40 per cent deposit.
A lender may ask you…
- The value of the property you wish to purchase, your deposit amount and the loan term
- Your age, marital status and number of children, plus proof of identity
- A breakdown of your income and outgoings including your P60, bank statements and utility bills for the last six months
- How stable your income is. If you’re self-employed you’ll be particularly scrutinised
- Records of previous loans or credit
- Lifestyle factors, such as whether you have ever gambled