Applying for a mortgage can be a daunting prospect, whether you’re buying your first home, looking to take a step up the ladder or remortgage. With so much hinging on being approved for a mortgage, it makes sense to improve your prospects as much as possible beforehand.
A mortgage application being rejected can seriously affect your plans. You may not be able to move to the house you’d hoped or find yourself paying more than anticipated in interest. First-time buyers are often presented with a list of steps they should take before seeking a mortgage, but it’s just as important if you’re moving home or remortgaging.
Being rejected and reapplying with a different lender can negatively affect your credit score and may influence other providers in their decision to lend to you. On top of this, preparation can help you secure a lower interest rate, reducing the amount you pay monthly and the overall interest over the full term of the mortgage. Even a seemingly small difference in interest rate can have a huge impact on your finances.
For example, borrowing £250,000 over a 30-year period would cost:
- £1,054 per month, with interest totalling £129,444, if you secured an interest rate of 3%
- However, if the interest rate was 5%, the monthly bill would increase to £1,342 and interest paid over the term to £233,139
- That 2% increase means you pay £103,695 more over the full 30 years
With this in mind, it’s worthwhile preparing to apply for a mortgage. Among the things you should do beforehand are:
1. Understand the value of the property and equity
Whether you’re remortgaging or purchasing a new home, understanding the value of the property is important. Lenders will base their decision to offer you a mortgage on many factors, whether the value of the home reflects the amount you’re paying is one. Calculating how much of the home you will own should be your next step.
- First-time buyers: If you’re a first-time buyer how much equity you will hold in your home will depend on the deposit you have to put down. A 10% deposit is the standard amount, meaning you will have to take out a mortgage for the remaining 90%, although 95% mortgages are available.
- Remortgaging or moving home: This will depend on the value of your home, how much your current mortgage is and whether you plan to add any further lump sums to reduce the amount. The more equity you hold the more competitive the interest rate you can usually secure. So, if the value of your property has increased, you may find you hold more equity than expected.
Please note: Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.
2. Check your credit score
Your credit score plays a crucial role in whether or not your mortgage application will be approved and the interest rate offered; it’s what lenders use to assess how risky you are.
A poor credit score may result in your application being rejected. Therefore, going through your credit report should be considered an essential task. Improving your credit score isn’t a simple quick fix, so it’s worth doing this several months before you plan to make a mortgage application. If there are inaccuracies on your credit report, ensure these are reported and corrected. Steps to improve your credit score include registering on the electoral roll, reducing the amount borrowed and ensuring bills are paid on time.
3. Gather paperwork
Applying for a mortgage can be a lengthy and time-consuming process. Getting the paperwork needed organised and to hand before filling in an application can help. This helps to minimise the chance of a lender coming back to request further details, resulting in a delay. You’ll typically need proof of identity, such as a passport or driving licence, three months’ payslips, bank statements from the last three to six months, utility bills and a P60. It’s always worth checking with your lender or broker to set out clearly what’s needed beforehand.
4. Review affordability
Before accepting your application, the lender will stress test your ability to continue meeting repayments. This includes the likelihood you can keep up even if interest rates rise. It’s worth doing your own test too. You know what your financial priorities are for the future and the lifestyle you want to lead. Checking if this lines up with expected mortgage payments can give you peace of mind about your financial security or act as a red flag if the mortgage level is too high.
5. Outline priorities
Often when looking for a mortgage, it’s the interest rate we focus on. It’s not surprising, it has a huge impact on how much money you pay out. However, you should consider other priorities and criteria too. For example, do you hope to overpay your mortgage on a regular or lump sum basis? If so, you should check what fees you could be charged with when making an additional payment. Alternatively, if you prefer to know what you’ll be paying every month, it may be worthwhile opting for a fixed mortgage over a variable one, even if the interest rate is a little higher initially.
6. Assess lenders
As we’ve mentioned above, being rejected for a mortgage can affect your credit score and, therefore, your chances of being approved should you apply again. As a result, it’s important to approach lenders that are likely to say yes. An eligibility checker can help here. But with hundreds of potential lenders, some of which don’t have a presence on the high street, this can be difficult. This is where a mortgage broker can add value. By sourcing lenders that meet your criteria and are likely to accept your application, you can hopefully speed up the process and secure the mortgage you want.
If you’re searching for a mortgage and want support, please contact us.
Please note: Your home may be repossessed if you do not keep up repayments on your mortgage.