What are the key steps to getting the right mortgage?
Mortgages can be a daunting thought – both for those of us that already have one and even more so for those who are trying to get on the property ladder.
Before entering into an agreement that will probably be the biggest financial commitment you'll ever make, here are some steps you can take to give you the best chance of getting the right mortgage for you.
Checking your credit record and its score
What's a credit record?
Pretty much everyone has a credit file (also known as a report or record) – whether they know and like it or not.
A bit like a financial CV, your credit record collates financial and other information about you that lenders can use to confirm your identity.
They'll use this information to decide whether you're a money-lending risk or a good prospect. And if you're the latter, your score may also influence their decision about the rate at which they lend you money.
Better scores typically equal better deal rates.
What's on a credit record?
While the precise detail may vary from one provider to another (and their scoring methods commonly differ), your credit record typically includes:
- details of bank accounts you hold
- details of credit accounts you hold/you’ve held (and how reliable you are/were in making repayments)
- your present and past addresses
- any financial connections: e.g. someone with whom you share a joint bank account.
Who can provide credit records, and is it really free?
Credit records are compiled by commercial organisations called credit reference agencies.
And most of them will keep a record on you – even though each version may vary slightly according to the way that the credit reference agencies calculate your scores. (There's no commonly applied formula.)
If you're not sure who to choose, check out who someone like Which? considers to be the best provider at any given time.
It's often a good idea to check out all three of the main providers and what they hold on you.
Which? also regularly publishes lots of great advice and comparative data on mortgages.
Ways to improve a credit score before applying for a mortgage
Scores are generally very fact-specific calculations.
Each lender will have a lending risk scorecard, and what one lender might want to see, another may not consider to be as important. Some lenders don’t credit score at all.
But to improve a score that you're told is not strong enough, or that you're worried may not look great, there are some steps that you can take, including:
1. Check the info on your record is correct
Make sure the information on the report is correct and get any errors amended as soon as possible.
2. Remove any irrelevant links
Anyone with whom you've previously lived, or with whom you may have applied for joint finance, could also affect your credit score.
So it makes sense to have a look at your report and remove any links to people you're no longer living with or connected with.
You can do this by contacting the report provider and making the request directly. Most of them contain instructions on their site for how to approach them about this request.
Redbourne advise that you contact the loan-provider and ask them to update their records. If the provider is one who might, for example, have granted you a joint account with someone else, and you're no longer with that person, you should ensure that you've closed any old joint accounts.
You should also contact the credit reference agency to notify them that you wish to de-link your association with the other named person, since you are no longer connected.
Receiving post to your address that doesn’t belong to you could also signify that records haven’t been updated. So clearly marking that post as 'No longer at this address. Please return to sender' and putting it back in the post would be a good practice too.
3. Make more than the minimum payments on any credit cards you have
4. Keep debts as low a possible
In particular, maintaining your credit cards at less than 50% of any credit limit is a good start.
5. Ensure you're on the electoral roll and that nobody is on those records and associated with your address when they shouldn't be
6. Don't apply for lots of credit in a short space of time
(It gives the impression that you may be 'desperate' for credit.)
7. Review your bank statements
Make sure that they accurately reflect your financial position. Double check that you're not still paying for things that you've cancelled too – standing orders and direct debits don't always get cancelled when contracts expire.
Take a look at step 2 below to find out how you can ensure your bank statements present you in the best light.
Reviewing your bank statements
Most lenders will want to look at your spending habits and affordability for a new mortgage.
They'll want comfort especially that:
- you aren’t in financial difficulty
- your income covers your outgoings
- most of all, that you can afford to make the payments on a mortgage – not only now but also in the event of higher interest rates in future
How to ensure your bank statements present the best impression to a mortgage lender
Redbourne's mortgages expert, Lianne Flello, makes the following suggestions:
Cancel subscriptions or direct debits that you no longer use.
Too many of us still leave these automatic extractions still leaching out of our bank accounts on a monthly basis.
Try to save as much money as possible towards your deposit
A bigger deposit will mean lower interest rates which in turn means lower monthly repayments.
Try to limit your applications for credit in the lead up to applying for a mortgage
Avoid payday loans in the run up to any application
Lenders really don't like them – they make them nervous about your financial stability. So think about other ways of financing purchases or emergencies in the 12 months before you plan to apply for a mortgage.
Make more than the minimum payments each month on your loans and/or credit cards
Clear them if possible. It helps your credit score if you owe less than 50% of your credit limit.
Review how you're saving your money for your deposit
Think about using schemes such as the Lifetime ISA, which is a government-backed scheme that could top up your deposit by 25%. You can save up to £4000 per year and must be between 18 and 40 to open one. Find out more on this here.
Make sure you are registered to vote
When you make an application, the lender will search you against your address as part of their applicant identification process. Being registered at the address you reside in really makes a difference. It shows greater permanence and responsibility.
Getting a mortgage when you're self-employed
Employees typically have an easier time getting a mortgage than someone who's self-employed.
For the self-employed, sole traders, general partners in a partnership that's not run on limited liability and, of course, anyone in the gig economy workforce, less certainty over regular monthly income can present an added challenge when it comes to applying for mortgages.
We asked Lianne about this and what this group of business people can do to make life easier for them when they're trying to give a mortgage lender confidence in their financial stability.
Lianne advised that giving a lender an idea of your financial stability helps: they may want to know about other savings or assets that you hold and the more financial history you can give them the better.
If you recently became self-employed but were doing the same work on an employed basis previously, or you can produce a contract showing a specified income, lenders tend to treat this evidence more favourably than the position where someone has started an entirely new business venture with no previous background/knowledge of that market.
According to Lianne, Redbourne can help people get mortgages with as little as 1 year’s new business accounts – but those with 3 or more years, where profits are increasing year on year, are likely to be offered a more competitive mortgage rate.
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