Get a ballpark figure
One of the first things you should do is get a realistic idea of how much you’re likely to be able to borrow so you can see if it is worth going ahead. This will depend on three main things: your income, your outgoings and the size of the deposit you plan to put down.
There are lots of mortgage affordability calculators online which will give you a flavour of the size of loan you might be able to get. The government-backed MoneyHelper website has one, as do many banks, mortgage brokers and comparison websites.
When you come to apply, the lender will carry out a detailed affordability assessment to work out what you can afford to repay based on your income and spending commitments. Lenders also currently have to “stress test” your ability to repay if interest rates were to go up or there was a major change to your circumstances such as being made redundant or having a baby.
Check your credit file …
Well ahead of applying for a mortgage, check your record with one or ideally all three of the main credit reference agencies: Equifax, Experian and TransUnion. This will alert you to any problems that might lead to you being turned down or offered a less competitive mortgage rate, such as a default on your file relating to a missed payment. In some cases you may be able to resolve these before you apply for a home loan, at which point the lender will carry out its own check.
Make sure your record is accurate and up to date, and dispute anything you don’t agree with. You can use a notice of correction to explain special circumstances behind previous arrears or defaults, such as a spell of illness.
The agencies typically offer several ways, free and paid-for, to check your credit record or score. For example, subscribing to the Credit Karma website lets you see your TransUnion score for free.
… and keep it in good order
Keep a close eye on your credit record in the run-up to applying for a mortgage. During this time, try to avoid applying for any other borrowing such as loan or overdrafts if possible, as this could put off a mortgage lender.
Also, try to steer clear of buy now, pay later deals when shopping, as this is a form of credit that will increasingly start to appear on people’s files.
Payday loans are bad news – some mortgage lenders will turn you down if you’ve had one within the past 12 months.
Review your bank statements
A mortgage lender will typically insist on seeing your last three months’ bank statements as part of its affordability checks, says Nick Mendes at the mortgage broker John Charcol. The lender will go through them with a fine-tooth comb to check you are financially healthy and can afford the repayments. So there is a strong argument for cutting back on your spending and reducing or clearing any overdraft.
“It’s worth tightening your belt in the months before you apply,” says the website MoneySavingExpert.com.
That maybe means cutting back on the non-essential extras that show up on a bank statement, such as rounds at the pub, takeaways and pricey coffees. You may want to go further and ditch things such as regular payments to Netflix, Spotify and the like.
Check your statements carefully. Are you paying for things you no longer use or need, or that can be obtained cheaper elsewhere, such as mobile phone insurance that you took out years ago? If so, ditch them.
Get familiar with “income multiples”
Traditionally the typical maximum for how much someone can borrow is four-and-a-half times their annual income. This is known as the income multiple.
If this is lower than you would like, the good news is that, with house prices having shot up over the last few years, some lenders have started offering higher income multiples. Halifax and Barclays are among those that will go up to 5.5 times income for high-earning borrowers. The mortgage lender Habito will go up to seven times salary in some cases. Meanwhile, a new lender called Perenna plans to launch mortgages of up to six times salary, and is inviting people to join its waiting list.
Grow your deposit
One of the toughest tasks facing would-be homeowners is saving up a deposit – it can take years. Halifax said in January that the average UK first-time buyer deposit in 2021 was almost £54,000 and represented 20% of the purchase price.
There are now more mortgages available that only require a 5% deposit than there were at the start of the pandemic. But if there is any way you can save up more than 5%, this will open the door to a bigger choice of deals and lower interest rates. For example, at the moment, fixed-rate mortgages where you borrow 90% of the property’s value are typically about 0.4 -0.5 percentage points cheaper than ones where you borrow 95%.
Some buyers will be able to boost their deposit by turning to “the bank of mum and dad” or other family or friends for help.
Get government help
The lifetime Isa lets you save for a first home costing up to £450,000. You can put away up to £4,000 each year until you are 50 and the government will add a 25% bonus to your savings, up to a maximum of £1,000 a year. To open one you must be aged 18 to 39.
Meanwhile, you can no longer open a new help-to-buy Isa, but if you already have one, you can pay in up to £200 a month, and the government will top up your savings by 25% (up to £3,000) when you buy your first home.
Register to vote
Make sure you are registered on the electoral roll at your current address. Lenders use it to confirm who you are. Not being on it could lead to some turning you down.
Think about a broker
With so many deals to choose from, some homebuyers may feel they need someone to hold their hand. A mortgage broker can survey the market and help you to find a deal that’s right for you. It’s probably a good idea to use one if, say, you have past credit issues or your employment or financial situation isn’t straightforward. There are a number of mortgage brokers offering fee-free advice including London & Country (L&C).
