Applying for a Mortgage: You’ve got an agreement in principle, and you’ve found the house that you want to purchase, now it’s time to apply for that mortgage. This can often be the most stressful time, particularly for first-time buyers. What’s the best mortgage product? Will your application be accepted?
It’s important to take your time and look at all the different options on the market. Securing the right mortgage is also a lot easier if you use a professional, regulated broker who can look at your unique circumstances and recommend the appropriate product.
Here we explore some of the different types of mortgages on the market today and what the application process involves.
Types of Mortgages
There are a lot of different types of mortgage available nowadays and it’s critical to find one that suits your needs. Most mortgages are either repayment or interest-only and they will run over a term of about 25 years. This is undoubtedly the biggest financial outlay that many of us will be involved in during our lifetimes.
Repayment vs Interest-Only Mortgage
A repayment mortgage is where you pay back a certain amount of your loan each month along with some interest. By the end of the term, you will have paid back the mortgage entirely and the property will belong to you.
An interest-only mortgage offers a lower monthly outlay because all you pay is the interest on the loan over the specified term. However, when the term is over, you will have to find the money to pay off the mortgage loan.
You may not be surprised to learn that the vast majority of products on the market are repayment mortgages. Interest-only products tend to be highly specific and available to only a narrow range of people.
Fixed-Rate vs Variable Rate Mortgage
These are both repayment mortgages and each has advantages and disadvantages. A fixed-rate mortgage gives you a guaranteed interest rate for a set period, usually up to about five years. This means you can be sure how much you will need to pay every month, at least in the short term. You can’t, however, change the mortgage or pay it off while you are in the period with the fixed-rate without incurring a penalty.
A variable rate mortgage means that your payments could change depending, for example, on the Bank of England’s base rate. While what you pay might change without much notice, a variable rate does give you a lot more flexibility if you want to move and sell your house or pay off the mortgage early without any penalties.
Tracker Mortgage
These are special variable rate mortgages that commonly ‘track’ the Bank of England base rate plus a standard rate added by the lender. For example, the base rate might be 0.5% with an additional 1.0% rate added by the mortgage company making an interest rate of 1.5% in total. Tracker rates are often popular because they have some of the lowest interest payments but you can end up paying more if the base rate goes up.
Discount Mortgage
This is sometimes given as an introductory offer at the beginning of a term and allows you a set discount on the interest rate of 1 or 2%. After that introductory term is over, you revert to the lender standard interest rate.
Capped-Rate Mortgage
This is another type of variable rate mortgage where there is a cap on how high the interest will go. For first-time buyers, in particular, this gives peace of mind that the repayments won’t suddenly hike to a rate that makes them unaffordable.
Other Types of Mortgages
Other products on the market include 95% mortgages. This type of product means you don’t have to find the large deposit normally associated with a mortgage – the downside is that they generally have high-interest rates attached to them.
There are also specific Help to Buy mortgages aimed at first-time buyers who are purchasing a new build. You can also find guarantor mortgages which are designed for buyers who can’t get a loan on their own – the guarantor (usually a parent or family member) agrees to pay if the person taking out the mortgage can’t meet their commitments.
Can I Take Out a Joint Mortgage?
Yes. Joint mortgages are often associated with couples who want to buy a house or flat together. More and more nowadays, however, groups of two or more people are getting together so that they can afford to buy a property.
Make an Appointment with a Regulated Mortgage Broker
When people are househunting, they often look to save money where they can. That includes not hiring the services of a regulated mortgage broker and doing the search themselves. Unfortunately, this is often a false economy, especially for first-time buyers.
There are several benefits in using an experienced broker:
- They understand that market. There are thousands of different products available in the UK today and finding the right fit will ensure that you have greater peace of mind in the years to come. With an independent broker, you get access to all the mortgage products and it will save you time and effort applying for the one that suits your needs.
- A good broker can save you money. There are often lots of little costs associated with getting a mortgage – a product that has a low interest rate, for example, may end up being more expensive when certain fees and conditions are added in. With a broker on your side, you can avoid the most common pitfalls that housebuyers face.
- A broker will also help you with the application process and make sure that you include all the information you need which makes it more likely you will be accepted. If there are any issues, the broker will also support you and liaise with the mortgage lender to get everything processed.
Regulated Broker vs Non-Regulated Broker
Mortgage brokers should be regulated by the Financial Conduct Authority and should have specific qualifications related to their profession. It’s important to check those qualifications and see if the broker is a member of a group such as the Association of Mortgage Intermediaries.
Some mortgage advisers can be restricted in the range of products they can offer – an example would be a bank that would only have available their branded mortgages. Other mortgage brokers, like the Sterling Capital Group, are fully independent and have access to a much broader range of products.
It’s also worth noting that many mortgage lenders will not deal with unregulated brokers so it’s important to check those credentials and do your homework.
What’s in the Full Mortgage Application?
People often think when they get an agreement in principle (AIP) from a mortgage lender that the application process is straightforward. An AIP is not a firm offer and the lender is not obligated to agree on mortgage terms once they have received your application.
You must take your time over the documentation and get it right before you send it to the lender. That’s why it’s a good idea to work with an experienced broker who knows what to look out for.
There are two types of application – execution-only where no intermediary is used and a broker supported mortgage application where you get advice from a qualified professional.
For the former, you will need to sign a declaration that you are making an application without professional advice and that you take full responsibility. Many lenders are also reticent about taking on a new client if they haven’t gone through an established broker.
As you might expect, because the amount being loaned is rather large, the application form for a mortgage is fairly lengthy, stretching to some 14/15 pages. The main sections you can expect to encounter are:
- Personal Details: This covers not just your name, address and date of birth but details such as your National Insurance number, how many dependents you have and previous addresses.
- About Your Current Home: This includes things like your existing mortgage if you have one or how much you are paying for rent and the name of your landlord.
- Employment Details: This covers who you work for, whether you’re self-employed, whether you work on a fixed contract or full-time and who previous employers were. If you are self-employed then you will also need to provide details of turnover and contact details for your accountant if you use one.
- Credit Details: This looks at the type of loans and other credit you may have, including any late payments, CCJs or IVAs you may have had against you.
- Budget Planning: Most applications will have a section on how you plan to manage your finances in your new home, stating incomings and outgoings. On most forms, this is fairly detailed and is designed to give the lender a clear idea of whether you can afford the loan in the first place.
- Property Details: The next section looks at the property you are hoping to buy, whether it’s freehold or leasehold, flat or a house, and whether it’s going to be your main residence.
- Mortgage Details: This is the amount you are looking to loan and the deposit that you have for the property.
On top of these details, you’ll need to provide information on how the building is going to be inspected and which solicitors you have instructed to handle conveyancing.
Common Mistakes on Mortgage Application Forms
With such a large document it’s quite easy to make mistakes when filling in the application form. There are a few common errors that we see quite often. The first is not filling in all the appropriate sections. There can also be a tendency to bend the truth, especially when it comes to credit information – you should always be aware that the lender will do a comprehensive credit check so being open and honest is critical.
Another issue is applying for the wrong mortgage in the first place. That’s why it’s essential to work with a regulated broker who can keep you focused on the right products.
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What Documents Do You Need?
In addition to the application, you will also be required to provide certain documentation to back things up. These include:
- 3 months bank statements: This allows the lender to properly assess your financial situation and compare it to the details you have provided in your application.
- 3 months of payslips and P60 form from your employer.
- ID such as current driving licence or passport.
- Address confirmation such as utility bill, council tax or bank statements, dated within the last 3 months.
- If you are self-employed, you will need to provide 2 to 3 years of accounts and SA302s. Some lenders may also require 3 months of business bank statements.
- Proof of your deposit from either a bank statement or a savings statement. If you are being gifted the deposit, you will require details and confirmation.
If you have stated on your application that you have additional income such as bonuses, overtime or non-earned income such as tax credits then you will need to provide evidence of this. Lenders may also ask for proof of residency.
What Income Can be Used to Support My Mortgage Application
It’s not just your income from employment that can be used to determine your mortgage application. If you have regular income from savings, pensions or even maintenance, it can all be added to build a clearer picture of your suitability.
Maintenance
If you receive maintenance payments, these may be considered by the mortgage lender but it’s not a given. Some lenders will say that you can include 100%, others 50% and a few will not consider it as additional income at all. If a couple have reached a private agreement on maintenance, it can make it difficult to prove to a lender compared to where there has been a court issued arrangement.
It’s important to work with an experienced mortgage broker if part of your income is through maintenance payments as they can help identify the lenders who are more open and accepting.
Overtime
Many mortgage lenders accept overtime as income but a lot can depend on whether it’s guaranteed, fluctuating or regular. A lot of employees, particularly those in sales, work on a commission base and lenders may well ask for more detailed payslips.
Bonuses
As with working overtime, many employees may well have bonuses at different times of the year. This again requires careful documentation and supporting evidence.
Pension
Borrowing money into retirement can be problematic but some lenders will take into account pension income when offering a mortgage. A lot will depend on whether you are already retired or looking to borrow into retirement and if you have other income to support your application.
Employment Income
For most people, their employment income forms the vast majority of the money they earn and is the main indicator for lenders. In most cases, you’re looking at maximum lending of about 4.5 times your annual income. Of course, this will also depend on your outgoings and the amount of debt that you currently have.
Self-Employed Options
Things are a lot more complicated when you are self-employed, especially if you only have a few years of accounts. Most lenders will look for at least two years and you will have to prove that you have a reliable income coming in. A lender might ask for more information such as detailed accounts as well as evidence of upcoming contracts.
Working with a mortgage broker can certainly make a big difference if you are self-employed and looking to buy a house.
Personal Income
If you are lucky to have personal income from savings and investment dividends or payments from an estate settlement, as long as you can prove that this is providing regular remuneration it can be used to support your application.
Ltd Company Net Profits and Personal Income
It’s important to use an experienced broker if you want to find the best lender to use your net profits with. Whether you’re looking for a mortgage as a director or a sole trader, there are a few lenders out there who offer what is called a net profit mortgage but a lot will depend on how long you have been trading for, your deposit and your age and credit history.
Insurance Cover and Your Mortgage Application
Several types of insurance can give you peace of mind when applying for a mortgage, though most are not mandatory. These include:
Life Cover
People tend to take out life cover so that if something unfortunate happens their family can afford the mortgage payments or, in some cases, pay it off entirely. It’s not something that lenders insist on but can certainly give you peace of mind – it’s also relatively inexpensive nowadays and there are some good products out there.
Building and Contents
One thing that you will need is building insurance cover. If there’s a fire at your home and it is damaged, the property will be devalued and that could disadvantage the lender so they will insist that you take out the right amount of cover. Contents insurance is not mandatory, however, but again can give you a good deal of peace of mind.
Income insurance
Income or mortgage payment protection insurance is also a wise idea if you are buying a property. Again, it’s not mandatory for applicants but can help protect you if you lose your job, for example, through illness or redundancy.
How Long Does a Mortgage Application Take?
While an agreement in principle or AIP can be reached in just a few short hours, the application for a mortgage can take anywhere between two and six weeks to process before your potential lender comes to a decision. In some circumstances, the broker can hurry up the process if the sale is urgent but in most circumstances, it’s best to be patient.
On average you’re looking at around a month before you get your decision. The lender will review your application form and do a full credit check and they may have follow-up questions. The lender will also organise a valuation of the property by a surveyor and check the price is fair and there are no defects or problems that could affect the value.
What Happens if My Mortgage Application is Not Approved?
If you’ve worked closely with your mortgage broker and they are good at their job, chances are you will have a reasonably clear idea of whether you’re going to be accepted or not. There can be several reasons why your application is not approved, however. These could include:
- You had a recent delayed or default payment on a bill or loan.
- You’ve had a CCJ in the last 6 years.
- You’ve made too many credit applications in the last few months.
- The lender thinks you won’t be able to afford the payments.
- You’re a self-employed or a contract worker but can’t prove your income to the satisfaction of the lender.
- There are errors in your application form.
Most of these mistakes or problems should be tackled when your broker works through the application process with you. It tends to happen more for borrowers who circumvent going through a broker and try to do things themselves. While this can mean a little less cost, it can also cause issues and delays.
It’s a good idea if you have been declined in this way to reach out to a local broker and find out what you can do. The good news is that mortgage brokers know the market well and may be able to recommend an alternative or rectify why your application was rejected in the first place.
Why Choose Sterling Capital Group?
There’s no doubt that applying for a mortgage can be highly stressful, particularly for first-time buyers. Working with a regulated broker can make a huge difference, ensuring that all the bases are covered and your application is properly filled out and sent in on time.
If you are thinking of buying a property and are now searching for the perfect partner, contact the team at Sterling Capital Group Ltd today.