Whether you're buying your first home or looking to remortgage, make sure you follow these ten steps...
I’ve prattled on about this for a while now, but I am currently in the process of moving house. And as a result, I’ve been sorting out my mortgage. This will be the second mortgage I’ve applied for and I have to say that second time round has been easier than the first.
So that led me to think that it was time to write an article on how to go about finding the right mortgage.
1. Check your credit rating
First of all, it’s a good idea to see what your credit rating is like. That’s simply because a mortgage lender will run a check of its own before it decides whether or not to lend to you. So it’s well worth finding out how yours is looking.
You can easily do this by signing up for a free credit report from Experian. Just make sure you cancel the membership after the 30-day trial period is up to avoid being charged in the future.
You should check your record thoroughly to see if everything is up to date and accurate. If there are any mistakes on your credit report, get them corrected. And if your credit record isn’t quite up to scratch, make sure you read 10 steps to a perfect credit record to find out how to improve it.
2. Work out what you can afford to pay
The next step is to sit down and work out what you can afford to pay each month on your new mortgage. If you’re moving house, chances are, you’ll be buying a bigger place and therefore you may have a bigger mortgage to pay off. So you need to assess what you can realistically afford.
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It’s a good idea to plan a budget to help you. You can easily do this by using this budget calculator from the FSA. By working out all your earnings and your outgoings, you should then be able to see how much you can afford to put towards your mortgage payments each month.
Don’t forget to also set aside money for insurance costs that come with a mortgage (such as buildings insurance and life insurance).
3. Work out your deposit
You’ll then need to calculate your deposit – the bigger your deposit, the better the mortgage deal will be. Indeed, the very best deals are usually only available for those of you with a 40% deposit or more.
If it’s your first mortgage, calculate how much money you have saved up to put towards your first home. (Don’t forget to deduct costs such as solicitor’s fees, valuation fees, Stamp Duty, moving costs and so on.)
If you’re moving house, you’ll need to work out how much your current property is worth and check how much of your current mortgage you have to pay off, to figure out how much you can put towards your new home as a deposit.
To get an idea of your property’s value, it’s worth taking a look at websites such as Zoopla. Note that the figure you will be given is only an estimate – don’t take it as gospel!
4. Fix or tracker?
Your next dilemma will be whether to fix your mortgage or opt for a tracker. Ultimately this depends on how much risk you’re prepared to take. Of course, while base rate is so low, it’s tempting to simply choose a tracker because they are currently cheaper than fixed rates.
However, you need to ask yourself whether you could still afford your monthly mortgage payments if base rate increases. If the answer is no and you’d rather have the guarantee of knowing exactly what your monthly payments will be each month, you’re better off with a fixed rate mortgage. And don’t forget, fixed rate deals are also currently at historically low levels.
Find out more in Rate rises will hit 90% of borrowers.
5. Think about the term
Changing the term of your mortgage can influence how much you pay. Typically a mortgage deal lasts for 25 years. However, if your monthly mortgage payments are going to be very expensive, you could increase the term of the mortgage to reduce the payments.
The major disadvantage of this is that you’ll be paying out a lot more in interest. That said, when you come to remortgage at a later date, you could then reduce the term of your mortgage to make up for it.
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It’s also worth pointing out that lengthening the term of your mortgage should really only be considered if you’re a fair way off retirement age.
On the flipside, if you’re remortgaging and you can afford to, it’s well worth reducing the term of your mortgage to below 25 years. This is particularly important if retirement isn’t that far off because otherwise you may have to cope with paying off a mortgage when you’re no longer working.
6. Don’t forget about fees
Unfortunately, when you apply for your mortgage you’ll usually have to pay an arrangement fee. If you can’t afford to pay it upfront, you will have the option to add it to your mortgage. But by doing so, you’ll end up paying interest on it, so it will end up costing you far more.
In fact, according to research*, the biggest arrangement fee on the market is currently £1,875 which could end up costing £3,519 if added to the mortgage!
So if you can’t afford to pay it upfront, a much better option is to use a 0% on new purchases credit card. The M&S Credit Card offers 15 months interest free on all purchases – meaning you can spread out your payments, without worrying about paying interest for over a year.
Just make sure you clear the balance before the interest-free period comes to an end.
You should also check whether there are any redemption fees for leaving your deal early or paying it off early.
7. Shop around
Once you've figured all of this out, you should take the time to shop around and compare mortgage deals. You can easily do this with our mortgage centre.
8. But don’t get too many quotes
Although you should shop around to compare mortgage quotes, be very careful when you’re doing this. Before you get any type of quote from a lender, ask whether they will be running a credit search on you. If they are, you may want to reconsider.
That’s because every time your credit rating is checked, it leaves a footprint behind on your credit report. So if you have a lot of credit checks carried out over a short period of time, this will leave a number of footprints on your report, and could mean you get turned down for credit in the future.
John Fitzsimons looks at three easy ways to reduce how much you are forking out on your mortgage each month
So find out what deals are available and once you've decided on which deal to apply for, you can then ask for an agreement in principle – a credit search will definitely be carried out at this stage.
9. Talk to a mortgage broker
I really can’t stress this one enough. When I applied for my first mortgage, I confess that I didn’t speak to a mortgage broker. Second time around, I have seen the error of my ways and have spoken to lovemoney.com mortgage broker, Tim Wilson.
By doing this, we’ve been able to chat through exactly what I can afford and which mortgage products fit my personal criteria – meaning I feel a lot more confident about what I am doing!
So I really would recommend talking to our own fee-free mortgage team who can provide you with completely independent mortgage advice – over the phone, by email or via instant messenger.
Find out more in Why a mortgage broker will always find you the best mortgage.
It’s also worth investigating whether the mortgage deal you want to apply for allows you to overpay. Several lenders allow you to do this - for example, Nationwide allows you to overpay by £500 each month.
Even if you may not be able to afford to do so now, you may be able to in the future. And if you can, you’ll save a lot in interest and clear your mortgage debt more quickly. So it’s well worth finding out before you apply.
*Research by uSwitch.
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