A mortgage is a long-term loan taken out by individuals or families who want to buy their first home, property, or land. Although each mortgage is different, most run for 25 years, and it could be shorter or longer, depending on the house and property you’re getting. When a person gets approved for their mortgage applications, the loan often gets ‘secured’ against the home’s value until it’s completely paid off. If you can’t keep up with your monthly payments, the lender could repossess or take back your house and sell it to get their money back.
If you’re thinking of getting a mortgage, read our guide to help you understand or get an idea about the entire mortgage application—from the various borrowing options available, to why you need to seek a professional’s help when you need to get a mortgage.
How Mortgages Work
Before you file in your mortgage application, you need to understand how mortgages work or get an idea of it. Essentially, the money you want to borrow is called the ‘capital,’ and the ‘lender’ then charges you interest on the total amount you borrowed until it’s completely repaid. The type of mortgage you can apply for depends on whether you want to make mortgage repayments in interest-only or both interest and capital.
- Repayment Mortgage – A repayment mortgage is where you need to pay the interest and part of the capital every month, and at the end of the term, which usually lasts for 25 years, you should manage to have paid it all off and ‘really’ own your first home.
- Interest-Only Mortgage – An interest-only mortgage, you only need to pay the loan’s interest rates and nothing of the capital or the money you initially borrowed. However, it’s becoming more challenging to get a mortgage that only charges interest since today’s lenders and regulators often worry about homeowners being left with massive debt and no way of repaying it. If you are considering getting a mortgage in this way, you’ll need to have an individual plan on how you’ll make the monthly mortgage repayments for the original loan at the end of the mortgage term.
- Repayment and Interest-Only Mortgages – You may also ask your lender to combine both mortgages, which results in splitting the mortgage loan or debt between a repayment mortgage and interest-only mortgage.
You may also hire a mortgage broker to help you find a mortgage that would work best for you, and make sure the lenders you’re borrowing from are authorised and regulated by the Financial Conduct Authority.
How Do Lenders Check If I Can Afford A Mortgage?
Before lenders give you a mortgage or the money to help to buy a home, they naturally want to make sure you could repay your debts. That’s why most lenders would need to know if you’re responsible when it comes to paying your debts, how much you could afford, and if you could pay off the amount of money you want to borrow, and other criteria, like age and UK residency.
To help you get an idea, though the requirements vary per lender, most lenders would need to know the following:
Lenders would usually want to see your most recent P60 (a form showing all the money you’ve been paid from your job or business in the whole tax year) and your three months to six months of recent payslips. That’s why you must keep these crucial documents on-hand as you need to show them to potential entities over time. Additionally, some lenders may also look at your government benefits, bank statements, check your credit cards, and child maintenance expenses.
Meanwhile, if you’re self-employed, you won’t naturally have payslips, and your income may fluctuate more than someone who’s employed full-time. If that’s the case, the lenders might ask you to produce accounts, and the credit checks could be more stringent.
Lenders might also ask you if you have any ‘outstanding’ or excessive loans or debts, credit cards, household utility bills, and insurance policies. They’ll also need to know about regular expenses or living costs you pay for every day, including child or spousal maintenance, school fees, childcare, and commute costs. Some lenders might even ask you to ‘estimate’ other living costs, such as how much you spend on your clothing or when you go out. So, for this, you need to show proof. That’s why you’ll likely need to give a mortgage lender a few months of bank statements to back up accurate figures.
Checking affordability is a thorough process. Most lenders would take everything into account, ranging from regular house utility bills alongside debts, loans, and balance on your credit cards to ensure you have enough expenses left to cover your monthly mortgage repayments.
Some lenders may also have you undergo a ‘stress test.’ This test is to see how likely you’re going to pay or if you could still afford the monthly mortgage payments when circumstances change, such as interest rates rising, you’re going into retirement or going into maternity leave. For instance, lenders may stress their mortgage rate by 3% to see if you’ll still be able to pay for your monthly payments or debts. Additionally, mortgage lenders may make a ‘Credit Check,’ or ‘Credit Report,’ with credit reference agencies after submitting formal mortgage applications to look at your financial and credit history, assessing how much of a risk you are willing to take.
If you’re considering applying for a joint mortgage, most lenders will look at the same things, including the finances of everyone involved. These include everyone’s credit score and credit rating before getting a chance to apply for a mortgage.
What Mortgage Can I Get?
There are several types of mortgage you could get, ranging from fixed-rate to variable rates mortgages. If you want to apply for a mortgage with fixed-rates, this means the interest rates stay the same for a set time. Meanwhile, applying for a mortgage with variable rates means the interest rates change in line with the Bank of England’s base rate or the lenders’ standard variable rate. The interest rates you’re offered depends on several factors, including how much you want to borrow, and how much deposit you could put down, whether it’s a small deposit or big one—and your credit rating or credit score. Additionally, some requirements for self-employed employees may differ, affecting your chances to get a mortgage that’s ‘good.’
Additionally, when applying for a mortgage, the type you get depends on whether you’re a first-time house buyer or whether you’re planning on filing a re-mortgage application or find a reasonable loan for a buy-to-let property. Hiring a mortgage broker or mortgage adviser could help you compare different lenders’ and their mortgage applications, and see if their requirements are stringent, such as asking for a credit report from credit reference agencies. Essentially, these professionals could help you find a mortgage that’s just right for you and see if the mortgage lender you’re interested in is legally authorised and regulated by the Financial Conduct Authority.
What You Need to Apply For a Mortgage
Mortgage lenders would naturally want to see some proof identity regarding your financial situation, including your credit score or credit rating—these need to comply with rules around the affordability of mortgage and money laundering regulations. However, when you apply for a mortgage, regardless of your deposit size or credit score, lenders would generally let you speak to them at their physical branches or via mobile phone.
With that in mind, the next step you need to take is providing the following information:
- Identity – To prove your identity to lenders, you’ll need to show them any form of identification card you have. These may include a passport, driver’s licence, house or utility bills dated within at least three months (mobile phone bills aren’t accepted), council tax bill, and official bank statements in the last 12 months.
- Income – To prove your source of income to lenders, you’ll need to provide several things. These include recent payslips from the last three months to six months, your latest P60, proof of bonus payments or commissions paid, bank states from the past three months to six months.
- Income (Self-Employed) – If you’re self-employed, most mortgage lenders would ask for other documentation as evidence of profit. These include at least two years or more years of certified accounts, proof from HM Revenue and Customs (HMRC) of your earnings in SA302 tax calculations and tax year overview from 12 months up to four years. Additionally, you’ll need to check whether the lender will accept paperwork you’ve printed yourself. Meanwhile, if you’re a self-employed contractor, you’ll need to show proof of upcoming contracts for the next 12 months and beyond. Finally, if you’re a self-employed company director, you’ll need to offer evidence of dividend payments or maintained profits.
- Expenditure – These are general expenses or living costs you pay for every day, including an ‘outstanding’ loan or debt, a credit card, house utility bills, and insurance policy premiums. You’ll need at least six months’ worth of bank statements and credit card statements, whether you’re paying for debts or utility bills.
These are some of the ‘basic’ requirements most mortgage lenders would require from the borrower. However, keep in mind that some lenders may ask for more documentation, like documentation of any existing credit card debt or loan you have. That’s because lenders have different criteria around income and outgoing funds. That’s why it’s best to ask your specific lender or mortgage adviser from a registered office what else you may need to provide. It’s worth noting that as of now, printouts of online statements of your credit applications, bank statements, utility bills, tax council bills, loan or credit card status may not be acceptable for most lenders.
You’ll either need to have a hard copy of each one or have copies certified by your solicitors, credit reference agencies, banks, or utility providers. The most crucial things you need to have evidence of are your debts, loan, bank statements, credit card debt, council tax bill, credit history, current credit rating or credit score or a full credit report.
Always Calculate the Total Cost of Your Mortgage
The lender or mortgage broker can do this for you but make sure they explain to you all the charges included in your monthly mortgage payments. These should consist of conditional fees like early payments for penalties. Additionally, when you hire a broker, they’ll usually charge a fee for advice or get a commission from the lender. They’ll usually tell you about their prices and the scope of their services during your first meeting, but remember that in-house bank and building society’ mortgage advisers,’ don’t charge fees for advice.
You’ll likely see the entire yearly cost of a mortgage as a percentage of a loan, shown as the annual percentage rate of charge (APRC) calculation, including any charges like valuation or redemption fees connected to your mortgage or debts. This APRC calculation can give you a more detailed comparison between different mortgage offers from one lender to another. You can also use a price comparison website to find a mortgage loan tailored to your specific needs. Doing this helps you see the best deals possible. However, keep in mind that it won’t give you the same results.
That’s why make sure you check and see from more than one website before deciding which lender you’re willing to work with, in the long run. It’s also vital for you to research the product and features you need before getting a mortgage.
Conclusion: Getting a Mortgage – Am I Eligible?
Your ability to qualify for a mortgage largely depends on several things, including the amount you want to borrow, your deposit size, and your credit score or ratings. Although it’ll depend on the mortgage lender, some other things they may ask you to provide are your employment status, income, expenses, life stage, and if you have any dependents, you pay. It’s a lengthy process, so before applying for a mortgage, it’s best to work out your budget beforehand to know how much you could afford to cover your deposit and monthly mortgage payments. Plus, to see if you have enough money for other fees that may come with the mortgage.
It’s also wise to check your credit file before applying for a mortgage to make sure it doesn’t have any errors. That’s because even the smallest mistake like getting your date of birth wrong could be the difference getting approved for a mortgage—or not. So, make sure your mortgage application goes smoothly by following the tips mentioned to improve your chances of getting approved for a mortgage, helping you get your dream home in no time.
Finally, you may wonder, how long will it take to have my application approved? The answer to that will depend on the lender you’ve chosen and your situation, but most aim to give a decision as fast as possible. However, on average, it can take around four to six weeks but remember the lender may ask additional questions, so keep your mobile phone intact for any messages, emails, and letters. So, the next step is to wait. You could make the mortgage application more convenient for you by hiring a professional mortgage broker or mortgage adviser. They may help you find the best deals from your preferred lenders that are authorised and regulated by the Financial Conduct Authority at either a registered office or firm.