What does it take to get a residential mortgage these days?
The mortgage market has changed considerably since just before the credit crunch, where at one point, all you needed was a pulse to get a mortgage. Things have changed somewhat, and knowing a bit about the market can help, especially if you want to get the best deals available.
Background:
The days when lenders worked on an “income multiples” system are more or less over. Back then, lenders would work on up to 5 times your salary; in other words, if you earned £60,000 a year, you could borrow up to £300,000. Many lenders would deduct things like credit commitments from the calculation, but it was quite easy to determine how much you could borrow simply by knowing a lender’s income multiples. Things are a little more sophisticated now.
So how much can you borrow?
These days, lenders use an “affordability calculator” to determine how much you can borrow. Available on most lenders websites, the affordability calculator is essentially a budget planner, and takes into consideration your income vs expenditure. Certain items are more heavily weighted than others. For example, your credit commitments carry much more weight than your gym membership.
Proving your income:
Mortgage lenders love “Employees” and will accept your latest payslip as proof of income and ask for little or nothing else. The Self-Employed have a much tougher time. Lenders will require three years’ worth of accounts or SA302s and are only interested in the net profit declared. The self-employed are able to pay less tax through putting expenses through their business, however this works against them when it comes to borrowing for a mortgage.
How much deposit do you need?
Many lenders will now accept a deposit of 5% for Help-to-Buy mortgages however, for the rest of us, a minimum deposit of 15% would be required to get a decent deal. Generally, lenders offer better deals for those with bigger deposits; as a general rule of thumb, think of paying down 25% of the value of the property or more to get the best deals.
What about credit score?
Whilst a perfect credit score is essential to get the very best deals, those who have had problems in the past need not despair. Bankruptcy is obviously a complete non-starter however some lenders lay accept an applicant who has had arrears on credit commitments if they occurred more than 12 months ago; especially if there is a good reason for it, such as illness or redundancy. Lenders aren’t keen on those who are careless with their finances. Lots of debt, not being on the voters roll, arrears and moving house too often are all bad for your credit score.
Repaying your mortgage:
Interest-only mortgages are no longer acceptable unless you have lots of equity in the property or a sound repayment vehicle. Generally, lenders would insist on a capital repayment mortgage over a term that ends at or before your retirement date. This means that younger applicants are able to take mortgages with a longer term which in turn reduces monthly repayments and increases affordability. Leaving it too late can therefore be an expensive mistake.
What about fees?
Good news, if you’re not a fan of upfront fees: Most lenders have deals where they pay the survey, product arrangement and even Solicitor’s fees for you. This however does have some impact on the interest rate; effectively they give it to you with one hand and take it away with the other. What you can’t avoid however is Stamp Duty, which is likely to be your second biggest cash outlay next to your deposit.
