Making sure you get the best deal on the biggest purchase you'll ever make
Buying a home is probably going to be the biggest purchase you'll ever make; so thorough research and a little bit of haggling for a good deal will be well worth it.
Before you begin looking for a mortgage deal, you need to ensure that your credit score is good and, that you have enough for a substantial deposit.
You should get a copy of your credit report and check to ensure that all the information is correct. If there are any aspects negatively affecting your credit score, you need to fix it.
If you have outstanding debts, you need to pay these off as far as possible, as well as ensure that you're up-to-date with your car loan.
If you’ve missed any payments over the last six months, it will show up on your credit report just as any country court judgement (CCJ) will. Both items will have a serious impact on your credit.
You also have to ensure that you have the cash flow to keep up with your mortgage repayments-so review your budget and make adjustments where necessary.
How mortgage lenders assess affordability
When a lender evaluates your eligibility they want to see how much money you have left over at the end of the month after all expenses have been paid – from household essentials to your car loan and regular bills.
They want to see how long you have been employed with your current employer; the longer the better because it will show stability.
If you're self-employed then you may have a tougher road ahead because you'll have to provide the lender your account statements, your tax returns as well as financial projections.
It may also be helpful to note that apart from the obvious expenses and, debts you may have, a lender may also look at “potential debt” which would be the maximum balances on cards and overdrafts.
Consider closing any you don't need and, if you're interested in getting a 0% transfer card, rather put this off until the mortgage goes through.
Qualify for a home loan
In order to qualify for a mortgage, you would have to make a deposit of at least 5% of the value of your chosen property however, you'll be limited in the number of providers that will be willing to approve your mortgage.
Some mortgage providers will require more, usually 10% of the value of the property but, the higher the deposit you make the better the mortgage offer you'll receive.
For starters, if you pay a larger deposit you'll be much more likely to get your mortgage application approved but, you'll also lower the monthly mortgage repayments.
This is because the loan amount will be less, will lower your risk of falling into negative equity and, also have a better chance of getting a lower interest rate mortgage scheme.
How to get started when looking to buy?
As a starting point you should begin by checking the prices of homes in the area you're looking to buy in and, work out what the minimum of 5% deposit will be.
You then need to calculate what your monthly repayments on that 95% loan will be. If you can’t afford the payments you will have to put off buying a home until you’ve saved up for a larger deposit or, have an increase in your income that will make it affordable.
What's the ideal deposit amount?
The ideal deposit for getting a very competitive rate on a mortgage will be 25% and above but, unfortunately, that’s quite a hefty sum of money for most people to save up.
There are also additional costs that you'll incur when buying a home and, this includes legal and stamp duty fees which we’ll discuss in more detail later on.
If you have family that could help you pay for a larger deposit, this could make all the difference in the world. Family members could also help you by acting as a guarantor and, therefore guaranteeing that your mortgage payments will be made.
This is only possible if your family member can prove that they are financially capable of covering their own expenses as well as your mortgage.
Are you a first time buyer?
If you're a first time buyer and are going to buy a new build then you should look into the Help to Buy scheme which will allow you to pay only a 5% deposit and have 20% covered by a government equity loan.
This scheme will allow you to be eligible for a mortgage of 75% and then receive better rates on the mortgage.
Additional costs when buying a home
Let’s look at some of the additional costs you'll incur in the process of buying a home. Firstly, you'll have to pay for the mortgage company to evaluate the property; this cost will vary depending on the value of the property but, typically ranges from £200 to £400.
Next you'll also have to pay for an independent surveyor to provide you with a report on the condition of the home. This isn’t expensive unless the home you're buying is old or, you suspect structural problems, in which case you'll have to pay in excess of £500 to have a complete structural survey done. If the home is new or, in a great condition, you should budget for around £400.
Next you'll have to pay for what is known as a Local Authority Search to ensure there are no undesirable building plans due to begin in or around your home.
You'll have to pay a solicitor or licensed conveyor to handle the documentation and legal issues on your behalf which could cost anything from £450 to £1, 500, depending on who you choose.
I recommend that you employ the services of a solicitor to handle the conveyancing process because should any unwanted issues arise during the buying process, they will be able to handle it on your behalf.
Finally, you have to pay a fee to the Land Registry to get the home on your name which will cost between £200 and £500.
The final consideration is that of stamp duty which, is payable on any home over the value of £125,000. If you're eligible for stamp duty you'll have to pay a minimum of £2,500.
Always have an emergency fund
In addition to the additional costs discussed above, you should have an emergency fund that will be able to cover at least six months worth of expenses in the event that you lose your job, become ill or have some sort of unexpected expenses arise.
If this occurs, it's important for you to go to your lender and explain your circumstances so that they can help you by lowering the monthly payments if possible. This will help you survive using the emergency fund for as long as possible and, save you from having your home repossessed.
The criteria to qualify for a home loan
Assuming you're in the right position financially to buy a home you will now be looking for a mortgage provider. It’s important to note first hand that each provider will have different criteria for evaluating your eligibility and document requirements.
If you're looking at a specific provider, you should contact them and request to be provided with this information so that you can adequately prepare yourself. The bank that you're currently with is probably the first place you need to try and, since you're already a customer, this will be seen positively.
Types of mortgages in the UK
Fixed rate mortgage
Let’s look at the different types of mortgages you can get; the first is what is known as a fixed rate mortgage where the interest rate you're being charged will remain the same over a two or five year period.
This allows for more accurate budgeting because the monthly repayments will stay the same but, there are some downsides to this type of mortgage. If interest rates fall, you will lose out since your payments will remain the same.
Variable rate mortgage
The second type is the variable rate mortgage which is best suited to those who can afford an increase in their monthly repayment. The benefit to the variable rate is that if the interest rates drop you will benefit from a decrease in your monthly repayments.
This type of mortgage is also usually cheaper than a fixed-rate mortgage and you are not bound to the deal as with the fixed-rate mortgage. This means that at any time you can change to a fixed mortgage rate.
Compare home loans
You should also look for discount mortgage rates being offered. Discount mortgage rates typically last for two to three years but, will help you reduce the monthly mortgage repayments for the time period but you may be liable to pay fees should you wish to leave the deal early.
You could also get a tracker mortgage that fluctuates in line with the Bank of England’s base rate. This is similar to the variable rate mortgage as your monthly repayments will be determined by an increase or decrease in this rate.
Capped rate mortgage
Another variable is the capped rate mortgage which is a variable rate mortgage but, the rate you are charged cannot increase above a specified amount so you would need to ensure that even if the cap is reached, you can still afford the repayments.
The final type of mortgage is the offset mortgage. This is where your savings and current accounts are merged with your mortgage so the rate will be based only on the difference.
This is a good option if you're interested in paying off your home faster because the savings will act as an over-payment.
Whichever deal you decide to accept make sure you know both the initial and exit fees of each as well as whether or not the deal will allow for over-payments.
Planning on paying your mortgage off early?
If you're keen on paying off your home loan early then you may want to opt for a flexible mortgage deal.
This type of mortgage deal calculates the interest on a daily basis rather than on a monthly or annual basis which will ensure any over-payments made will have an immediate impact on your loan balance which will save you a lot on interest.
Additionally, you can request a payment break for up to six months, this is particularly effective for those who have a certain degree of unpredictability in their lives.
Although you won’t be making payments during this approved break, interest will still be charged so, when the break ends, you may have to pay more to make up for it.
If you’ve overpaid you also have the option of borrowing back from these over-payments, which could be really helpful when you have some unexpected expenses pop up.
Mortgage loan terms available
The next thing you need to think about is how long you want the term of the loan to be. The golden rule here is that the shorter the term, the less interest you'll end up paying but, you can only do this if you are 100% certain you can afford the higher monthly repayments.
Taking out a short-term loan on a variable mortgage rate is very risky since the already higher monthly payment is subject to the possibility of a further increase should the rate go up.
If you cannot make your mortgage payments you should always contact the lender as soon as possible as they may be able to reduce the payment by extending the term of the loan.
Find the best deals by comparing online
The bank is not the only place you can get a mortgage deal-use many of the online comparison tools available to help you spot some of the best deals.
You should employ the services of a mortgage broker because they will be able to help you find the best deals available in the market and which lenders will best suit you.
When you choose a broker you must ensure that they check all the different deals available in the market because you don't want to miss out on a deal simply because the broker didn’t include it in the options because he wouldn’t make a commission on them.
You should ask them about what they’ll charge you for their services upfront – whether this is a direct fee that will sit in place of any commission or a fee on top of a commission.
If the broker is independent you can choose between a fee and a commission but remember if a broker wants to charge you more than 1% of the value of the mortgage then you should look elsewhere.
There are some lenders that don't operate through brokers so, always check up on what deals they offer, in addition to those offered by your broker.
You can then use an online tool that will allow you to compare the two best deals. Remember that with mortgage deals you should use the Annual Percentage Rate (APR) to compare the deals but rather the rate you'll be paying for the incentive period over the term of the loan.
Reviewing your mortgage offer with care
Once you’ve made your mortgage application and, are approved, you'll receive a mortgage offer. You must review the conditions that you are sent thoroughly before you agree to anything.
You are looking to make sure that you understand all the key facts and conditions and that there are no errors. Your solicitor and mortgage broker will also review the offer you’ve received but don't rely solely on their judgment as you may find hidden issues arising later on.