You’ve found the perfect starter home. The ‘Bank of Mum and Dad’ (and perhaps mum-in-law and dad-in-law) has been kind, and you can just about borrow, you reckon, the rest of the price on the basis of 3.5 times your pay. But, and I say this with regret, you are not yet mortgage ready.
Three more tests have to be passed in the world of modern mortgages.
Lenders are more risk averse than they used to be. If they lend to people who are not perfect borrowers then the regulator, the Financial Conduct Authority, may punish them. So they apply extra tests.
How is your credit record?
It should be as near perfect as you can make it. Get on the electoral register of course – and with the new personal registration it is your job not the head of household’s to make sure you are there. Then, always ensure you pay all your regular bills on time. Because a single late payment can send your credit score plummeting. A missed payment is of course even worse.
Credit cards must always be paid on time – take out a direct debit to do that, preferably in full. Nowadays credit reference agencies are recording much more about you than loans and bank accounts. If you have a mobile phone on a monthly contract those payments will also be on your credit file. So will many household bills such as a TV or broadband package, even gas and electricity, or water may be there – it varies depending on your supplier. So keep up to date. And try to keep your credit score to as close to a perfect 999 as you can.
What about your other spending?
The mortgage lender will want to see if you have enough money left over each month to afford the mortgage repayments. They will ask what you spend your money on. Don’t even think of fibbing. Check your bank statements because they will and maybe your credit card account too. Three months back is normal but six or longer is possible. That means a year before you start applying for a mortgage begin to live a very quiet life. Cancel the second holiday, move the first to a small tent in Devon. Stop indulging in meals out and those Friday sessions down the pub. And swap the nail bar for a packet of emery boards.
The lender may also ask about your future – do you intend to have children? And your past. Have you ever had a payday loan or gambled? Quite bad, pretty bad, and very bad.
Related: The 8 Rules of Selling Your Home
Do you have enough to meet those mortgage payments?
Even if the answer is ‘yes’ that is only the second of three hurdles. The third is not in your hands. The lender will want to play ‘what if?’ What if interest rates rose? The Bank Rate has been stuck at 0.5% for years. Recently there have been semi-official hints it may go down further. But the lender will still want to see if you could cope if the rate charged on your mortgage increased by 3% at any time in the next five years. That could push up your monthly payments by a third or more. Could you still afford to pay them?
Follow these tips and hopefully you will be mortgage ready when the time comes!
Credit reference agencies – google Experian UK, Equifax UK and CallCredit plus the word statutory – to find how to get your £2 credit report. To see a credit score will cost more.