Applying for a mortgage is the height of adulthood for a lot of us. It can be very intimidating – after all a mortgage means being in debt for several years… Even thinking about beginning the mortgage process can be overwhelming.
That is why we created this guide. To show you the most important aspects of taking out a mortgage as a first-time buyer. We hope that after reading this, you’ll anxiety will ease up a bit so you can focus on the excitement of buying your first home.
Your Pre-Mortgage Checklist
Let’s start from the very beginning – even before you do your research on mortgages available to you. There are some things that you can do to make your mortgage application go smoother. If you follow them, your reward will be less anxiety and a better deal on your loan.
Cut Down On Your Expenses
As you will see in the next sections, mortgage providers check not only your income but your expenses as well. To get a better mortgage offer, you need to decrease your expenses about 3-6 months before applying for a mortgage.
This means postponing the purchase of expensive items e.g. electronic gadgets, vacations, etc. It will also help you save for the intimidating deposit that you will need to have available in cash.
Don’t Change Jobs
If possible, avoid switching jobs in this 3-6 month period as well. Lenders will value that you have a stable job with a steady income. They’ll show their appreciation with a better mortgage deal.
Be Smart About Your Credit
For one, don’t take out a loan close to the date you’d want to apply for a mortgage. The lenders will check on this when evaluating your application.
If you already have credit (e.g. a car payment, student loan) or you use a credit card, make sure you don’t overdraft. This would be a red flag for your application.
Planning Your Mortgage
Before you start diving into the application process, you need to do some research. You want to go about this the smart way. This requires a bit of planning and investigation from your side.
Save Up For The Deposit
You need to have a specific amount of cash available to buy a house. This will mostly go towards your deposit (with the rest covering other costs of the sale).
The pandemic pushed the required percentage for the deposit higher. In January 2021 the average deposit mortgage lenders asked for was around 15%. Fortunately, the UK Government will provide a guarantee for banks on 5% deposits. This will make getting on the property ladder easier.
Saving only the first 5% of the purchase price sounds very sweet. We will say though that the more money you can allocate towards your deposit, the better deals you will get on your mortgage.
Plan Your Budget
Before you consider the mortgage providers and the available options, it is important to have a rough estimate of the budget you can expect.
There are numerous mortgage calculators you can find online after a quick Google search. Most of them will ask you about your employment status, whether you are taking out a loan alone, and other factors.
The most important elements you will need to input into these calculators are:
- Your average monthly income
This includes: your payslips (including overtime pay and bonuses), maternity pay, any side-hustle you have, monthly income from your investments, any rental property you have
- Your average monthly expenses:
This includes: living costs in general (e.g. food, rent, utilities…), repayments to your existing loans
- The post-purchase expenses (in some cases)
This includes: the Council Tax, home insurance, mortgage fees, and the Stamp Duty
Once you made your calculations, you will know the rough mortgage amount you can expect.
Check Your Credit Score
Your credit score will play a major factor in the acceptance of your application. The score runs from 0 to 999 and signals to the mortgage provider how reliable you are as a borrower.
You want your credit score to be as high as possible. This gives you a better chance to see your application accepted and you will also get better interest rates.
Multiple factors influence your score. These include:
- Any existing debt you already have
- How well you are keeping up with monthly payments for these
- Whether you are paying your bills on time
- How your credit card balance looks
- Whether you have applied for credit before
Several free online credit score checkers will over time, survey how well you are doing in this area.
Investigate Your Mortgage Options
Each mortgage was not created equal. You have several options you can choose from. Which one would be the best for you depends on your budget, your preferred repayment period, and how well you tolerate risk.
You can figure out what a fixed-rate mortgage is from its name. If you choose this option, the interest rate for the mortgage will be fixed for an agreed period of time.
- You will know exactly what you need to pay each month
- It will be easier to create your monthly budget going forward
- No risk to you from increased interest rates in the future
- Interest rates tend to be a bit higher for these than for variable-rate mortgages
- Should standard rates fall, you don’t benefit from this decrease
- At the end of the agreed period of time, the interest rate will move to the standard rate of the bank which might be on the higher side
Overall, fixed-rate mortgages are better suited for the risk-averse folks out there. The stability of this mortgage will give you more safety. It will also make it easier to make your month-to-month financial planning.
Standard Variable Rate Mortgage (SVR)
This is the opposite of the fixed-rate mortgage. Here the interest rate is affected by the base rate of the mortgage provider. Your monthly payments change as the base interest rate increases or decreases.
- You can benefit from a decrease in base interest rates
- Most SVRs will not charge you extra for an early repayment i.e. you have the opportunity to pay back the borrowed sum earlier without a penalty
- The rate changes monthly so planning your budget will be harder
This mortgage option is better suited for less risk-averse people who are not as strict with planning their month-to-month budgets.
A tracker mortgage follows the base interest rate set by the Bank of England. This is a fixed economic indicator, which means that the mortgage repayments will be tied to the economic climate.
For a tracker mortgage, you need to consider the economic situation in the UK. This option is probably best for those risk-takers.
Discount Rate Mortgage
You might have guessed from the name, this is mortgage has the lowest interest rate… for a fixed period only though. The interest rate of a discount mortgage is lower than your average SVR mortgage. Unfortunately, this is only true for a shorter time (the banks need to benefit as well)… The length of this period is determined by the lender (usually 2 to 3 years).
After the discount period expires, the mortgage turns into a standard value rate mortgage. This means that from then on the monthly mortgage payments will depend on the base rate set by the lender.
Finally, capped mortgages are the last type of SVR mortgages. This is the ideal option for those who want the benefits of a standard variable mortgage but also want to protect themselves against drastic rises in rates.
A capped mortgage has an interest rate ceiling. Interest rates cannot rise above this even if the base rate surpasses this figure.
- You are protected against drastic increases to the base rate
- You benefit from decreases to the base rate
- The lender will usually offer you a higher interest rate for this extra protection
The Mortgage Application Process
Choose Your Mortgage Provider
Selecting the best mortgage provider can be time-consuming. You will need to shop around and get offers from multiple sources. Even then, understanding these offers can be hard. You need to take into account:
- The rates
- The mortgage period
- The loan terms
- Requirements for the deposit
- Whether they require a buildings insurance
- Other mortgage fees
That is why hiring a mortgage broker can be beneficial for you. A mortgage broker or advisor will prescreen the mortgages available to you based on your existing finances. They can save you time by directing you to mortgage providers who are likely to accept your application.
They can also reduce some of the burdens from that oh-so-evil paperwork. Your pockets and your stress level will surely benefit as the mortgage broker will do a thorough search for you on the mortgage market and handle most of the communications with the potential lenders.
Keep in mind though that some brokers get a commission from the lenders. This means that they are more likely to steer you towards lenders that pay them more. Make sure that the mortgage advisor you choose is a whole-of-market broker so they don’t just offer you loans from a select few lenders.
Prepare The Paperwork
Okay, so we already covered some info that the lender will need from you to give you the final offer. After you have chosen your mortgage provider, you’ll need to prove that the data that you provided are legit.
You’ll need to verify:
- Who you are
- Where you live
- Your financial information
- And your deposit amount
A fair warning before we dive in: the process and paperwork required differs a lot based on your unique situation. You need to hand in different documents if you are applying for a mortgage as a couple or as a single person. There are also differences based on your employment (e.g. self-employed or employed).
Your mortgage broker or mortgage provider will have an exhaustive list of required documents for you. To get a rough idea of the type of documents you’ll need, keep on reading.
Evidence Of Your Identity & Address
Starting from the most basic requirements, you’ll first need to prove that you are who you claim to be. An up-to-date passport or driver’s license would work for this.
You also need to verify your current address. To do this, you can submit one of your latest utility bills that has your name and address on it. It can be a gas, electricity, or water bill.
Evidence Of Income
The most important documents you’ll need to provide as a regular employee are your payslips from the last 3 months. There are some requirements for these. The payslips need to have the name of you and your employer, the date range it covers, and both your gross and net salary.
If you are self-employed, the paperwork is a bit more difficult. You’ll need to have a statement from your accountant going back at least 2 years. This is required to show the bank that you have a steady income.
The other documents you need to hand in are only relevant to you if you have other sources of income. We listed a few of the possibilities for you below:
- Any additional earnings
- Supporting paper you need to hand in: Your tax return form SA302
- Overtime, bonuses or commission
- Supporting paper you need to hand in: Your payslips / your P60 form
- Child benefit – child tax credits
- Supporting paper you need to hand in: Your latest HM Revenue and Customs letter / the tax year’s award / the bank statement proving this payment
- Fostering income
- Supporting paper you need to hand in: The latest letter from your local authority stating the number of children and the length of the fostering period
The mortgage provider will also ask for your bank statement for the latest 3 months. They need these documents to validate your income and to check your expenses.
The bank statements should have your name, address, debits, commitments, and the running balance on them. Furthermore, if you have already taken out a loan before, you’ll need to submit your mortgage statement as well.
Proof Of Your Deposit
Most mortgage lenders will ask you to prove that you have sufficient funds for the deposit. In the most common scenario, you’d only need to show your bank statement. You don’t need to hand over any other documents.
If you get some money for the deposit from your family or friends, the paperwork is a bit more complex. You will need the help of your solicitor. They will need to get a statement from the person helping you out that the deposit is indeed a non-refundable and unconditional gift – i.e. they will not ask for any interest in the property.
If you want to use your inheritance for the deposit, you’ll also need your solicitor to draw up an official statement about this.
Get An ‘Agreement In Principle’
After you prepared the necessary paperwork, it is time to get an agreement in principle. You can and should request an agreement in principle from several lenders. If you have a mortgage broker, they will be handling this on your behalf.
An agreement in principle will show you a rough estimate about the mortgage you can take out according to the information you provide. Keep in mind though that this is only an initial offer – it is not a definitive agreement from the lender.
Why do you need it? Aside from valuable information to you, it can also be a good signal to the estate agent. It shows them that you have the funds available and are serious about buying a house.
We have one more additional piece of advice for you at this stage. Ask the lender creating the agreement in principle to only do a ‘soft credit check’ on you. As you could read above, applying for loan factors into your credit score. Don’t let them do a ‘hard credit check’ to avoid decreasing your score.
Get The Formal Mortgage Offer
After you have your eyes set on ‘the one’, your mortgage provider will most likely want to do a survey of the house. This way, they can assess the value of the property and formulate their final offer.
After you receive this, you can still accept or decline. Your mortgage broker can also help you make a smart decision about this.
Taking out a mortgage is stressful. It has multiple steps, and we won’t lie – it can go wrong sometimes. However, if you follow the steps and tips we listed for you, you can ease up a bit.
If you are looking to finally have a house that you can call your own, browse our properties. Our selection of new builds is perfect for first-time buyers.