The credit crunch of 2008 brought with it a general tightening of the rules by which the mortgage lenders operate. In large part this was driven by legislation introduced by the UK government in an attempt to stabilise the mortgage market and protect banks and lenders from over-lending to borrowers perceived to be relatively poor risks.
A lender will decide who it lends to and how much it charges for its money based upon several factors. Those factors will set the likely risk of the loan (i.e. will the borrower pay it all back) and the cost of the loan (i.e. the interest rate and fees charged by the bank to reflect that perceived risk).
Of course, whilst mortgages may be harder to come by, most of us still need a mortgage in order to buy a home. It therefore makes sense for a lender to make themselves as appealing as possible to a lender if the borrower wants to have a choice of mortgages at competitive prices.
A large part of a mortgage lender’s decision-making now comes from what are known as ‘affordability tests’ or ‘stress tests’. These calculations are based around the lender’s personal circumstances. The less risky the lender, the more money they can expect to be able to borrow and the lower the cost of borrowing.
In today’s world, it is easier than ever to find out someone’s personal information and check facts provided by borrowers. It’s therefore well worth taking time to make sure that when your mortgage application is checked, everything is in order.
Before your application there are several things you can either do - or avoid doing - to better your chances of success. You might be best advised to start this process at least 6 months before you plan to make an application. They are;
1: Delay moving employment or going self-employed until after you have your new mortgage in place. Lenders want to see stability and a recent job move won’t help your application. Of course, a promotion or significant increase in salary is helpful, as long as the new income is not considered unpredictable.
2: If you are self-employed get your books in order and ask your accountant to get your accounts up to date. If you have been keeping your income low for the sake of the business’ cashflow this is the time to consider whether you can afford to give yourself a pay rise. If you don’t have an accountant, apply to the tax man for an SA302 which will act as proof of income.
3: Clear or reduce existing loans. If you can, consider clearing outstanding loans and credit card debts, although keep at least one credit card active.
4: Revisit your monthly budget and make savings where you can. If you have any money owed to you, collect it. Cut back on luxuries and try to save more every month. A regular pattern of saving and clear evidence that you are able to live within your means is very important to a prospective lender. If you are a smoker this could be the incentive you need to add discretionary income to your savings. It will also benefit you when you apply for life insurance if you don’t smoke!
5: Make sure you have regular income showing on your bank statement and make sure you will have six month’s bank statements and recent utility bills and proofs of ID before you apply for a loan. This will speed up the process.
6: Make sure you are properly registered on the electoral role. This will be checked and if you aren’t properly registered it will cause problems.
7: Consider checking your own credit score prior to applying for a mortgage. There are several businesses out there (such as Experian or Equifax) that will do this for a small fee and if you check it first and find a problem you might be able to deal with it before they do their own check.
For more information or speak to an mortgage adviser call us on 01628 507477.