The days of banks falling over themselves to give you a mortgage are gone. However, borrowers can boost their chances of taking advantage of the current crop of home loans by giving themselves a mortgage makeover.
In the heady days of the property boom securing a mortgage often simply involved a quick hunt online, a phone call, and filling in a form.
But with lenders tightening their criteria as a result of regulatory changes, demanding bigger deposits, and cherry-picking the best borrowers, potential homebuyers or remortgagers now need to put in some hard work.
The Mortgage Market Review, brought in by City watchdog the Financial Conduct Authority in April 2014, is an attempt to clean up the home equity loans market and ultimately means two things.
The first is the official shift from old-fashioned salary multiple lending to affordability calculations, but in reality, many lenders have been pushing this since the financial crisis.
This means weighing up your essential spending, alongside your income and asking questions about your outgoings. A mortgage lender will look at the gap between what you have to spend each month and what you have coming in – and then do its sums from that.
So expect to be quizzed on habitual spending on things like feeding the family, childcare, a car loan, your energy bills, and even a mobile phone or gym contract.
Mortgage lenders will also need to take a stab at working out what will happen to you in the future and stress test for theoretical interest rate rises. You will need to provide documentary evidence of regular outgoings and what they set you back.
The good news is that there are good home loans out there and three simple steps can increase your likelihood of mortgage success
Make yourself attractive
There are some simple things you can do to make yourself a more attractive proposition to a lender and remove anything that will put them off.
Make sure that you are on the electoral roll and everything is in order with your address. Lenders will check your name against your address and everything should match up perfectly.
Check your credit file, with the major credit agencies Equifax, Experian, and CallCredit, and make sure everything on there is in order. Challenge anything that is wrong or any financial links to other people that are not correct.
Also, take out a credit card, spend some money, and pay it back.
Lenders like people with a history of borrowing money and paying it back on time. It may not be within your control but mortgage brokers also recommend that if you want a mortgage to buy a home, don’t switch jobs or rental properties.
In uncertain times, lenders like stability. That means the same job for at least six months or a year, the same home lived in for six months, and a steady income shown on your bank statements.
Do your sums
The days of casually being able to add a couple of thousand to a mortgage at the last minute are over.
If you want to get a loan you need to know exactly how much you need to borrow, how much your home is worth, and what percentage the mortgage is of your property’s value known as loan-to-value.
You can work out your home’s value using similar properties for sale, remembering to take off a reasonable discount, and This is Money’s house price calculator.
The best mortgages are available for those with larger deposits of at least 40 percent – ie 60 percent loan-to-value and below.
Mortgage Affordability Calculator
Don’t worry if you cannot stretch to this most lenders also offer good deals to those borrowing 75 percent or less, while above this it is trickier to get a good rate but still possible to find a mortgage.
The higher the loan-to-value you are, the more expensive you can expect mortgages to be.
The rate is also set according to how long the deal is. You will see lower rates on two-year deals and higher ones for five years.
Mortgagerates are influenced by a number of interlinked things, the Bank of England base rate, and its expected path, the rate a bank or building society has to pay savers to attract their cash, so it can then lend it out as mortgages, and the cost of funding on the money markets.
You need to weigh up all these factors when choosing a mortgage.
You need to work out whether you want the security of a fixed rate, advisable for those who would struggle if their monthly payments shot up, or are happy to risk a tracker and pay more if the base rate rises.
You also need to consider whether you think you will save money by changing rates after two years or are happy to pay a bit more for five years of certainty. But it is not just the rate you need to consider. Lenders also make money from fees they attach to mortgages.
These can amount to anything up to £2,500 and can make a seemingly cheaper mortgage actually work out more expensive. So it is important to add this to the total cost of the loan when comparing mortgages.
The best mortgage is not always the one with the lowest rate. The arrival of super-fee mortgages, which offer low rates in exchange for a big arrangement fee, means that those with smaller loans could end up out of pocket by opting for a bargain rate.
The general rule is the bigger your mortgage the better a high fee/low rate deal will be – but watch out for percentage-of-loan fees that are more expensive for larger loans.
Also watch out for any charges at the end of the mortgage, such as early repayment charges and exit fees.
There will also be costs for getting your property valued and for the legal process of a purchase, these can mount up, and some deals that offer to pay these for you can work out well.
You will also need to work out all your other financial commitments, as lenders will ask about these to evaluate how much you can afford to borrow.
Take your pick
Under the new rules, almost all mortgages will have to be taken out with financial advice.
This can be from a bank adviser who will only recommend their employer’s own products, in which case doing your own research across the whole of the market is vital, or via a mortgage broker that can search the whole of the market for you.
Using a broker can be beneficial as they can help you through the whole application process and should know what type of applicants a lender will accept. This can speed up the process and means you don’t waste time with other lenders.
A broker may have access to exclusive deals and could help find lenders that cater for niche cases such as those with a poor credit history or who are self-employed.
Some brokers will not charge any upfront fees and will instead get paid from the commission if you take out a mortgage with them. If you don’t take out the mortgage they recommend, and there is no obligation to do so, you should not end up paying.
Other brokers will charge you for searching for products and for the application process.
There are some banks such as HSBC and the Post Office that do not work through brokers so it is still worth keeping an eye on the wider market.
All mortgage brokers should be listed on the FCA register – if a broker doesn’t appear there then they are not authorized to provide mortgage advice.
Before you even get to this stage, you can use the internet to research what the best deals look like, you can then go into the process well-informed.
The quickest and easiest way to compare mortgages is online. This is Money’s Mortgage Finder can help you search with your criteria.
The big choice is whether to fix or track your mortgage. A fixed-rate gives stability and the knowledge that your payments will remain the same for a set period, whereas a tracker allows you to take advantage of any further Bank of England rate cuts.
Tracker deals may appear attractive when the Bank of England base rate is low, but rates will eventually go back up, making these types of products more expensive.
You could also go for an offset mortgage, which allows borrowers to balance savings against their mortgage and only pay interest on the balance in return for not receiving interest on their savings.