About Mortgages

A mortgage is a loan that you use to buy a property. When you buy a home, you’ll put down a cash deposit (usually at least 5% of the property price) and pay for the rest using a mortgage from a bank or building society. You then pay the mortgage plus interest back in monthly instalments over a set number of years. Below are the basics of the requirements to obtaining a mortgage:

Credit Score

To help a lender assess your application, it is usual that they will use a form of scoring system to decide whether to accept your application. Different lenders give different levels of importance to your circumstances, and some set a higher pass mark than others. It is normally based on three core areas:

• Public record information (e.g. the electoral roll)
• Credit account information (e.g. records of amounts of loans and your payment history), and
• Search information (e.g. the number of applications you have made for credit)

This means that care is required to ensure you approach the most suitable lenders, as an application will be recorded as a search (even if unsuccessful) and can then influence other lenders’ decisions

• Check your credit file – the information isn’t always accurate and you can ask the agency to correct any inaccuracies
• Make sure you’re on the electoral register – lenders can be a bit suspicious of anyone not registered to vote
• Check your address is current on all your credit, bank and mobile phone accounts – you don’t want to give the impression that you have more than one address
• If you have credit cards you don’t use, close the accounts – having several credit cards can count against you
• If you’ve never had credit in the past, apply for a credit card so you can build a credit score
• Make sure you pay all your bills on time – being only a few days late can result in a default showing on your credit file
• Avoid using payday loans – it will make you look like someone who can’t manage money

Affordability

At the moment it is easy to lull yourself into believing you can afford the mortgage you need – mortgage rates are at all-time lows and feel easily affordable. However, you need to ask yourself if you can afford your mortgage payments if interests rates rise and whether you can repay the capital if house prices fall.

Let’s say you manage to find a mortgage with an interest rate of three percent, fixed for three years. That’s a great rate. After three years you find interest rates have gone up and the best deal you can now get is six percent. That’s an increase of three percentage points but, more frighteningly, your interest rate has increased by 100%. Will your net take home pay have increased at the same rate?

You should budget on the assumption that interest rates will rise during the term of your loan. So be sure you can afford your mortgage repayments when that happens, not just now.

Deposit

Lenders are no longer happy to take all the risk of buying your new home, and so do not lend 100% of the value of the property. If you are, unable in the future, to pay your mortgage, the lender needs reassurance that it can take your home and cover the loan by selling it.

Less risk taking means lower loan-to-value (LTV) ratios, and personal deposits need to be larger than in the recent past.

You will need at least 5% as a first time buyer and typically 20% to access the most competitive interest rates on the market. The source of the deposit may come from your current property, savings, inheritance or a gift.

Be aware that deposit loans from family and friends can still not be accepted as a source of deposit by some lenders, or can influence how much they may lend you.

Valuation and Survey Fees

Before a lender will grant you a mortgage it will insist on a valuation to prove the property is worth what you’re paying for it. The size of the valuation fee will vary by lender and property value but for a property costing £200,000 expect to pay around £355 (source: Halifax February 2016).

The basic mortgage valuation is for the lender’s benefit so that it feels comfortable lending against the property. 
You may feel you want to add a survey to the valuation that gives you a report on the general condition of the property.
Costs vary but for a valuation and survey on a house costing £200,000 expect to pay around £545 (source: Halifax February 2016).

If you are buying an older property, or one in a general state of disrepair, you may choose a full structural survey.
This is a thorough survey that examines the structural condition of the property and gives you advice on repairs.

Depending on the property expect to pay between £500 and £1,000.
Obtaining comparable examples in the same area and for similar property will help you obtain a benchmark.