If you speak to a mortgage lender, they tend to say they don’t use income multiples and that working out how much to lend is much more sophisticated. This is partly true; the Office for National Statistics provides mortgage lenders with data on typical living costs, breaking it out for people living on their own, in a couple and so on. Mortgage lenders then build this into their calculations, so there is a bit more to it than meets the eye. Even the most sophisticated lenders will put an income-based limit on the size of a mortgage though.
People should also be aware that their existing debt commitments are taken into account for affordability tests, including repaying car loans and credit cards and, for graduates, the commitment to repaying any student loans too.
There is also some difference in borrowing ability based on credit score. People tend to either pass or fail a credit score, and can then either be accepted or rejected for a mortgage. Some lenders score on a gradient though, and tailor the amount they’re willing to lend accordingly.
Dealing with the deposit
Saving up a deposit is normally the most difficult part of buying a house – apart from maybe choosing one! But once you have your deposit, applying for a mortgage is relatively straightforward. It’s important to apply for a mortgage as soon as possible – even before viewing a house. Having a mortgage – or an agreement in principle – already in place marks someone out as a serious buyer. The ability to do a deal quickly can be a critical advantage when buying a house, especially if there is a bidding war.
Generally speaking, a larger deposit (and lower mortgage balance) results in a lower rate of interest. Few people realise this only applies in multiples of five though. If you have a 13% deposit, your interest rate will be the same as someone with a 10% deposit. It’s only when you go up to a 15% deposit that you might get a cheaper rate. Otherwise, you’re probably better off leaving part of your deposit untouched.
Improving the chances of getting a mortgage
It is important to have a clean bill of health when applying for a mortgage, but not as important as people often imagine. Mortgages are secured against a physical asset, so lenders tend to be more relaxed about credit profiles than unsecured lenders like credit card companies.
The easiest way to clean up a credit profile is to use a service like that offered by Experian. The two most common issues are people failing to update their addresses and having too much unused outstanding credit.
If you don’t update your address with your credit card provider, you effectively lose all the credit goodwill from regularly paying credit card bills. Fortunately, this is easy to fix by updating your addresses on Experian and making sure the kudos for being a responsible borrower is properly applied. I’ve seen clients go from a fair to excellent credit score literally overnight from doing this.
You can get a free 30 day trial with Experian, with its service then defaulting to a £14.99 subscription each month. It’s also possible to buy a statutory credit report from them for £2. The link to do so is buried within their website, but a quick Google search finds it quite easily.
It’s also worth looking at the percentage of available credit used. It doesn’t look good regularly using 90% of available credit. It’s much better to use a lower amount and show that you’re a responsible borrower.
What a lot of people don’t realise is that having too much unused credit is also negative. Say you have £25,000 available to spend across two or three credit cards. Mortgage lenders are cynical and will look at that and assume you’re going to spend £25,000 on furnishings as soon as you move. Managing outstanding credit is about striking a balance between repaying unsecured debt on time, and not having so much that lenders get nervous of a spending spree.
