17 Mar 2016
Author: Stephen Breen
Although there are some great deals on offer in the mortgage market right now, the process of getting a mortgage is rarely plain sailing. Here, we offer a few tips to help you find a good mortgage deal and maximise your chances of being accepted.
Affordability tests were tightened up following the Mortgage Market Review to prevent customers from over borrowing. Now, you will need to prove every pound of your income and justify every penny of your out-goings, showing that you can afford your new mortgage payments both now and in the future should interest rates rise.
Your lender may question what you spend on a wide range of essential and discretionary items including socialising, eating out, hotels, holidays and essential travel, cigarettes, alcohol, your mobile bill, gym memberships, TV and internet subscriptions, new clothes, haircuts and grooming, parking fees, dry cleaning, pets, hobbies, cleaning products, eye care, dental care, groceries and childcare. If you are able to reduce your spending on discretionary items in the months running up to your mortgage application, this can help to show you can easily control your spending and afford the new mortgage payments.
If you have children at a private school, the private education bills can be a problem as these are often regarded as a full time credit commitment rather than a discretionary item. Your excess income is therefore significantly reduced, putting enormous pressure on the affordability calculation. There is little you can do to address this, aside from reducing spending elsewhere as far as possible. However, some lenders do view school fees differently – for example, if you have sufficient assets to cover the fee commitment over a period of time, the lender may be willing to disregard the payments in the affordability calculation. Other lenders will consider large bonus payments as evidence of being able to cover the commitment. Nationwide, Halifax and Metro Bank are three lenders to try where school fees are an issue.
In addition to asking about spending, lenders will usually ask about future plans, such as to expand the family or give up your job for self-employment. Other questions are designed to detect any risky behaviour such as a gambling habit, or the use of payday loans indicating an inability to manage finances effectively.
EU rule changes
From 21st March, the EU’s Mortgage Credit Directive will come into effect. This contains strict rules on measuring affordability, but these should not have an impact in the UK as they have already been in place for the past two years. However, there are some changes to be aware of: currently, lenders do not have to carry out affordability checks where a borrower has come from another lender, where there is no additional borrowing. This will change with the introduction of the new rules, and all borrowers will be subject to the affordability checks.
Finding a great deal
Mortgage interest rates are very low right now and there is a huge range of products on offer for you to choose from. Some packages even include a free valuation, free legal work and no mortgage fees, giving you even better value for money.
Yorkshire Building Society is currently offering a two year fixed rate at 1.14%, and HSBC has a 5 year fixed rate at 1.99%. Leeds Building Society also has a 10 year deal at 2.75% (fee: £1,499), possibly the lowest ten year rate ever.
Tracker rates are worth considering, given that the base rate is at 0.5% and is unlikely to rise in the near future. Santander is offering a 2 year tracker at 0.89% above the base rate (1.39%) with a £995 fee – this comes with a free valuation, free legal work and no early repayment charges. Trackers often have no penalty for making a higher payment or switching, allowing you to jump onto a fixed rate in the event of an interest rate rise. However, you may prefer a fixed rate mortgage which does offer you the certainty of knowing there won’t be a sudden sharp rise in your payment for a set amount of time.
Rates for first time buyers with smaller deposits have been getting increasingly competitive. Newcastle Building Society offers an excellent 3.59% rate on its 5% deposit mortgage, with a £199 fee. Yorkshire offers 2.08% for its 10% deposit mortgage, with a £1,475 fee. Some brokers predict that these rates will drop further in the future, thanks to intense competition between lenders to attract new custom.
Various Government schemes are also giving first time buyers a helping hand – the latest Help to Buy ISA for people who have never owned a property before offers savers a 25% bonus on their deposit, per person. Each person can deposit an initial £1,000 on opening the account, then up to £200 per month. They are eligible for the bonus once they have saved £1,600 or more. As an example, a couple open separate Help to Buy ISAs and deposit an initial £1,000, then save £200 each per month. At the end of the year, they will have £6,800 between them which the Government tops up to £8,500. Currently Halifax and Santander are offering the most competitive Help to Buy ISAs with interest at 4%, tax free.
The Chancellor has also just announced a new lifetime ISA for the under 40s to be launched in April 2017 which can be used to buy a home or to save for a pension. Savers will be able to each put up to £4,000 into this ISA and will receive a bonus of 25% from the Government. Those using the ISA to buy a home will be able to withdraw the money after a year of saving – and anyone who already has a Help to Buy ISA will be able to transfer this to the new lifetime ISA. Savers can have both types of ISA but may only claim the bonus on one type of ISA towards the cost of buying a home.
It is still difficult for self-employed people to get a mortgage unless they have 2 or 3 years of accounts – but thankfully more lenders are dropping the requirements down to just one year. Kensington, Precise Mortgages and Halifax all offer mortgages to borrowers with 1 year of accounts (Precise will accept your SA302 and HMRC overview instead of accounts), without requiring that you are a professional. Kent Reliance also offers a mortgage with 1 year of accounts to professionals.
It is worth knowing that a number of lenders take other sources of income besides salary, such as tax credits and child benefit, into account. Your main source of income still needs to be employment or self-employment, but the additional sources of income can be considered when calculating how much you can borrow. Nationwide and the Halifax are two lenders who will consider benefits when processing your mortgage application – some other lenders take just 50% of this type of income into account.
Borrowers aged 65 or more have historically found it more difficult to get a mortgage – but thanks to the Building Societies Association, these age restrictions are now being reviewed by 30 lenders. Already, Bath Building Society and The Family Building Society have no upper age limits and will review cases individually. National Counties will consider lending up the age of 90 if the borrower has a suitable pension scheme in place, and Kent Reliance and Ipswich Building Society both consider borrowers up to the age of 85.