This guide has been designed for anyone wanting to switch their current mortgage to obtain a better deal. The UK mortgage market continues to be a competitive environment, with the growing choice of available products making it difficult for prospective and current home buyers to choose the right products for them without a significant amount of research being undertaken.
There may be deals out there, but it may come with some obstacles to overcome first. The aim of this guide is to help you determine your eligibility for a particular remortgage product and what you need to do to apply. You may fall under two main categories that this guide has been created for:
Those remortgaging – If you already have a mortgage in place and wish to move lender; or alternatively you own the property outright and now wish to borrow money against it.
Individuals moving home – This guide will also help provide guidance if you are looking to move.
Introduction to remortgaging
Your mortgage is likely to be the largest financial commitment in your lifetime. Therefore seeking out ways to reduce its cost will be of great interest to anyone wanting to save money.
Why should I remortgage?
Remortgaging is a process that involves shifting your mortgage from one lender to another in order to obtain a better deal. You are also not even required to move properties to do it.
There are multiple reasons why remortgaging might be a suitable choice to you, most of which point towards the ability to save money on your monthly payments. Due to the length of time typically a mortgage is held and the interest that applies, a small monthly saving can have a large nominal effect of the term of the loan.
Lenders rely on complacency of their customers most of the time. Reverting to the lender’s standard variable rate (SVR) can be an expensive option, however in some circumstances it is the most cost-effective choice. It is essential to evaluate your own situation before making a decision. If remaining on the standard variable rate, ensure the decision is based on a critique of the numbers, instead of inertia. Otherwise you could be missing out.
To avoid any costs of switching, it may be worth challenging your current lender to provide you with a new offer. As the lender currently generates revenue from offering you the loan, they will want to continue being your lender of choice and may still be satisfied in offering a slight discount if loyal and on-time with past payments.
Remember if you do need to move providers, there will be a financial cost to be borne. As mortgage interest rates have fallen, the fees lenders now levy have increased substantially. An exit charge may be payable to leave your current lender in addition to an early repayment charge (ERC) in an attempt to reduce the incentive for you to switch.
This does not mean that the whole process of remortgaging is not viable, just that care needs to be taken to understand the net benefit or cost of doing so. Normally the savings will be significant for some, especially if your have a large amount of debt still outstanding.
Remortgaging is more difficult than previously
In a low interest rate environment when mortgages are cheaper for the buyer, getting accepted is becoming more difficulty amid tighter affordability criteria and stress testing against future interest rate hikes.
With some many applications being submitted to lenders, they are in a position to cherry pick the customers they want. The marketplace has changed dramatically from pre-2008 where finance was far more easily obtained.
The situation got so severe that between 2012-14 the UK government pumped tens of billions of pounds into a scheme called ‘Funding for Lending’ with the sole purpose of trying to encourage lenders to maintain a decent level of supply of secured debt lending to small business enterprises.
In order to get a favourable deal, three things are commonly needed:
- Decent equity – Previously it was possible to borrow more than the market value of a property up to 125% with some lenders when confidence over rising property prices was not tested. Nowadays lenders require you to borrow less than 95% of its value, with the lowest interest rates requiring a deposit of 40%.
- A strong credit score – Sorting out your credit score should be done proactively, months before you intend to purchase. With a large number of applications to assess, lenders are becoming increasingly reliant on a strong credit score being maintained over time, prior to an application being accepted.
- Affordable monthly repayments – Since 2014, stricter affordability checks have been introduced. This meant that stress testing had to be undertaken under circumstances where interest rates rose by 3%. The EU Mortgage Credit Directive was the key legislation that covered its introduction. ‘Self cert’ mortgages were also outlawed.
Lenders will also focus on your regular committed expenditure such as credit card payments and rent. The disposable income you have after all expenses are covered is used a much clearer indicator of an applicant’s level of affordability.
Other reasons you may wish to remortgage
In addition to saving money, there are also other reasons as discussed previously as to why you may want to consider remortgaging. These include the following:
Your loan product is no longer suitable
Whilst mortgages have long time frames, circumstances can change over time due to factors including job promotion that brings additional income, or benefiting from an inheritance. As a result, you may want to make additional payments to your mortgage but your current deal will not allow you. It may only permit small overpayments without incurring a charge.
Payment holidays can be a useful resource if you believe your ability to make future payments on time may be affected. An example may come from returning to education or changing job roles. Flexible and Offset mortgages that combine personal savings may be an option.
The wide choice of products available today means there are options for everyone to meet their needs, subject to qualifying conditions being met. For flexibility, where a bespoke solution needs to be created, this will come at a premium.
This may take the form of a fixed cost or as an increased interest rate being applied. Therefore, if you are looking for flexibility, ensuring all the components are used efficiently so you are not paying for innovation that you are not using.
The product does not do what was originally anticipated
Previously millions of people were sold endowment mortgages during the 1980’s and 1990’s. Nowadays current holders have been advised that a shortfall is highly likely for a number of varying types of policies that are potentially significant on their endowment.
With an endowment mortgage, your monthly payment has two sections. One part of the payment goes directly to the lender to cover the interest that is accumulating on the loan. In addition, the second part is a smaller payment that is paid to an insurance company that invests the sum on your behalf. By doing this, you are not paying off any of the capital you owe.
Therefore if you decided to borrow £100,000 on an interest only basis, you will still owe the bank £100,000 when the term comes to an end. Hopefully, the regular sums you have invested will have grown and be sufficient enough to pay off some or all of the debt.
Where a shortfall occurs, funds need to be found from other sources and a surplus can be credited to the original borrower after the debt has been settled. If you currently have an endowment in place and have received correspondence saying a shortfall is likely, now is the time to act.
As the borrower, you will still be responsible for paying off your outstanding mortgage on the due date. In the eyes of the lender, it is your problem and not theirs if you endowment falls short. One possible solution is to convert some or all of your loan into a repayment mortgage to ensure you will have enough to clear the debt. Doing this will of course increase the cost each month but you will be repaying capital as well as interest.
You can then opt to cash in your endowment in an attempt to use the lump sum to pay off some of your mortgage. Alternatively, you could also keep it going as a separate investment. It may be worth speaking to an independent financial adviser to help with this complicated decision, especially if relying on the life insurance provided by the policy.
There are many who are relying on an individual savings account (ISA) or self-invested personal pension (SIPP) to repay their interest only mortgage face an uncertain future. If any investments held perform worse than expected, this will affect your ability to repay any loan outstanding. In most cases, it may be worth converting part of the loan to a repayment mortgage as soon as you can afford it.
At the end of the mortgage term, many opt to sell their property in order to pay off the capital sum, assuming the value of the property has grown or at the very least has remained unchanged. There is also no guarantee that with the proceeds that you would be able to buy another property that meets your requirements.
You want to borrow more money
Your lender may have rejected your application to lend more money (known as a further advance) or the terms under which may not be deemed competitive or favourable.
Under these circumstances, remortgaging may be a viable option that might allow you to raise more money at a better interest rate. Although it is important to be aware of any fees your lender may levy.
Avoid adding too much borrowing onto your mortgage
It was common for many lenders previously to allow non-housing debts to be added to a mortgage. This may include funds to purchase a new vehicle, consolidate any prior debts or conduct various home improvements. The latter presents an opportunity to potentially add value to your home or investment property. This is now no longer allowed under most circumstances, aside from the purchase of new build properties where integrated appliances and choice of internal decoration may form part of the overall property package being bought.
The brutal truth was the reason dictates whether this is deemed a sensible move. To calculate the cost of borrowing, many simply look at the interest rate that is being applied, neglecting to include the length of time over which the debt is being serviced.
Borrowing at 10% over five years is far cheaper than borrowing for 5% over twenty years, because the cost of borrowing takes into account the interest being applied and the term of the loan.
Personal loan £10,000 at 10% over 5 years = £2,750 interest
Adding to mortgage £10,000 at 5% over 20 years = £5,840 interest
As you can see, the true amount of interest has almost doubled. Inflation has the effect of devaluing the purchasing power of the debt over time which means adding it to a mortgage may seem like a plausible solution. The one exception to this rule is if using a mortgage product that allows substantial overpayments without penalty, you will be paying off the new debts as well as the original one in much less time.
Who should not remortgage?
Despite the range of savings available to some homeowners, there are certain groups of individuals where remortgaging would not be the most cost-effective option available. Key considerations should be your personal situation, money and timing broadly speaking. Essentially, you should decide whether the savings available at the time you are considering switching deals will outweigh the costs of doing so. Care should be taken if you fall into one of the following categories.
You are on a good deal already
You may already have a market leading mortgage deal in place which means considering switching is not likely to present any benefits. However, more often than not, improvements can be achieved with your deal and this is when remortgaging may be more beneficial. It is worth checking regularly to ensure you have a solid deal for now and the future.
You are locked into a deal
Alternatively, you may be on a poor deal but are locked in with early repayment charges and conditions which prevent you from switching. The cost incurred in doing so, which can be significant erode any benefits calculated.
When your incentive period is over, consider re-evaluating your choices, taking care if interest rates have also changed during this period. If you are open to consider swapping to a different product with the same lender, they may accept a lower early repayment charge being applied. This is known as a product transfer process.
Your timing is not optimal
It is true that in recent years, mortgage rates have reduced to record low levels. Some rates charged are based on changes in the Bank of England’s base rate, what is happening in international money markets and the lender’s own priorities from a commercial standpoint.
If interest rates rise, remortgaging is unlikely to be suitable but this depends on your own personal circumstances.
If you own less than 10% of their property
If your loan to value (LTV) is 90% or higher, you will often find it difficult to find a good remortgage deal. 95% mortgages continue to be more popular options with the introduction of the government’s Help to Buy scheme, requiring prospective buyers providing a deposit of just 5% of the property’s value. Its purpose is to encourage home ownership for first time buyers, however although the intentions are positive, not everything to do with this scheme is ideal.
Due to borrowing such a large proportion of the property’s value, the rates charged are not competitive. Therefore unless you are on a very high rate, you should aim to get below the 90% threshold to gain access to better options.
If your home equity has shrunk
You may have had a 10% deposit when you first bought your home and got a decent mortgage, borrowing the remaining 90% of your home’s value. Suppose now your property’s value has dropped, meaning the amount you owe increases. Known as evaporating equity, this can be massively damaging despite continuing to make payments. In worse cases, you may enter negative equity where your debt exceeds the property’s value.
Where this occurs, or at least you expect this could occur in the future, being proactive could be beneficial. It may be worth checking with your lender about the rate you are being charged and whether a product with a more competitive rate could be obtained. If your lender has nothing available, the only thing that can be done is to wait for prices to potentially rise again, continuing to make any overpayments when possible whilst minimising or totally avoiding any fees that may be incurred from overpaying.
Your personal circumstances have changed
It is common for your financial situation to change over time after getting a mortgage initially. For example, you may have become self-employed or one of the original applicants have stopped working altogether to return to education.
New lenders may not be prepared to offer you a new product due to no longer meeting their initial criteria. Therefore, you may be better to stay on the same product with the original lender.
You have a poor credit history
Multiple factors can lead to potential credit scored being lowered, such as missing credit card payments or using an unplanned overdraft on a regular basis. If this is a common occurrence, this may create issues when you wish to remortgage.
Since the credit crunch of 2007/8, lenders have become far more picky regarding who they accept for financing. The ideal customer will be one who has a proven track record of repaying debts and making payments on time.
Your mortgage is relatively small
Once your outstanding loan falls below a certain amount (generally £50,000), it may not be viable switching lender simply due to the size of the fixed fees that may be applied. These charges will be disproportionately larger than any interest rate saving you may benefit from for the remainder of the loan term.
Some lenders will not accept mortgage applications below £25,000-40,000 for the same reason. The smaller the loan, the larger the effect of any fees levied. Many deals that are available require fees to be paid that are in excess of £1000.
Getting ready to remortgage
Before delving deeper into starting the process, there are a few checks you should make on your current mortgage deal. Some of these have been mentioned briefly already, but discuss them in more depth.
Will you be paying an early repayment charge?
As discussed, most mortgage lenders have an early repayment charge payable during the initial period (some also have extended penalties after the deal ends too). If you remortgage, this will trigger the charge and this can mount up to a large sum. Therefore, before going ahead, check the following:
- Is there a charge payable?
- What is the size of the charge in total?
- What date does it apply until?
Understanding the amount of the total charged for ending your current deal prematurely can then be assessed against the benefits of doing just that. Where the period of time until the early repayment charge is applied is relatively close, in most circumstances it is worth waiting. You will be eligible to switch as soon as the next working day after the period ends.
Will a deeds release fee be payable?
In order to boost revenues and reduce the incentive to switch, lenders may also charge an administration fee relating to the release of property deeds to you solicitor. This ranges from £50-200.
A lender is only able to charge these fees if you were made aware at the time of your application being agreed. To check this, look at the offer document and the key facts illustration. If this charge is not included, notify them of this and ask for the fee to be removed.
How much is owed to your current lender?
Checking out how much you owe is necessary to understand how much you need to remortgage for. When contacting your lender, do not accept estimates and request a full figure.
Giving a date in the future (such as after the next payment date) will take into account any normal repayments you are due to make between now and the proposed date of the remortgage taking place. Relying on an estimate means a shortfall could ensue or taking out a pricier mortgage than what is actually needed.
How much can be borrowed?
Previously, lenders would use a multiple of your income to calculate how much they would be willing to lend you. Typically this was usually four times the gross salary of all applicants listed, whereas some would look at your net income after income tax and National Insurance (NI) contributions have been paid.
Nowadays it is all about affordability. Lenders now take a much more thorough approach to assessing your disposable income after committed monthly expenditure are deducted to work out how much spare funds you have available.
This process can get difficult for a buyer to follow as different lenders have alternative ways of computing and assessing these calculations based on their propensity to lend. Some will look at how recently you have used your credit card along with the amount of available credit you have to use on an ongoing basis.
Even if passing this initial assessment, the Financial Conduct Authority (FCA) also requires all lenders to ensure a mortgage remains affordable subject to changes in interest rates. A stress test is used to demonstrate the effect on affordability should interest rates rise by 3% to ensure you as the applicant are not stretched to the edge of your finances.
How much equity is needed in a property?
100% mortgages are generally a thing of the past despite attempts by banks like Barclays to encourage a comeback. The key question is how much of your property’s value are you seeking to borrow from the new lender.
By borrowing less, you are demonstrating to a potential lender that you are more solvent. Overall, this means the loan is deemed lower risk to the lender. Since mortgages are secured loans, through the process of lending, the lender itself is also taking a risk on both house prices and interest rates. This is eventually managed by the full loan being repaid at the end of the agreed term, or a repossession taking place in the interim where repayments are not kept up.
If only looking to borrow 75% of a property’s value, prices would need to fall by 25% before the lender would be unable to recoup the full value of the loan lent. Therefore this offers more protection versus higher loan to value (LTV) mortgage products.
What counts as equity in a property?
It is important to note that your borrowing will depend on two factors:
The equity in your home – If you have an outstanding mortgage of £150,000 and the property’s value has risen to £200,000, you would have £50,000 of equity. If you are applying for a remortgage to replace the original loan, the £50,000 equity is equivalent to a deposit for someone buying a property.
The ability to put in extra cash – To get a mortgage you will need equity of at least 5-10%. In order to obtain a decent rate, you will need at least 20% of the home’s value and 40% for market leading rates. The rule is simple – the larger the equity and savings the better the rate. This will result in lower monthly payments and the cheaper overall the remortgage will be.
The difference between a 10% and 20% deposit can be highly significant with larger jumps being at 25-40%.
What is the difference between LTV and deposit?
LTV stands for loan to value and shows the proportion of a property value that you are loaned as a mortgage. A simple method of calculating this is by subtracting your equity from the value of your property as a percentage. For example, if you have equity totalling £25,000 on a £125,000 property, this is represented as a 20% deposit. This means you owe the other 80% of the property via a mortgage totalling £100,000. The table below allows you to calculate the differences easily.
Table of LTV and deposits.
The main reason for both these terms being used in this way is that the same terminology can be applied across all mortgage products from first time buyers to those who are looking to remortgage. By purchasing a property, even if it is to be used for your main residence you are still making an investment that is affected by numerous factors like interest rates and the changes seen in the housing market.
A practical example is if you originally purchased your home for £100,000 with a £10,000 deposit, your LTV would be 90%. After a few years of making payments your LTV may have dropped to 85%, assuming the property’s value remains unchanged.
If we now assume that the property appreciated in value to £120,000 over the period then your LTV would be around 70% (as it’s £85,000 divided by £120,000 multiplied by 100). As a result, you will be in a position to get a much better remortgage deal. On the flip side, if the property fell in value to £80,000 you would now owe more than the property is worth (also known as negative equity) and you would be ineligible to remortgage.
Is it possible to drop an LTV band?
Having a lower LTV can save you a large amount of money over the term of your loan. The calculations below is based on the best value two-year fixed rates for a remortgage with a property value of £150,000. Based on a capital repayment mortgage over a 25-year term at the time of printing.
If you are close to a threshold, it would be worthwhile trying to move down a band to benefit from lower repayments and greater options available. There are two main ways to drop an LTV band:
Borrow less – Calculate the additional funds you need to commit in order to drop to a lower interest rate band and see how much interest you could save each month.
Value higher – When applying for a mortgage, an estimate is required regarding the value of the property, known as a valuation report. As the owner, you would want to get the best value possible but it needs to be realistic. The lender is likely to instruct their own valuation to be conducted independently later in the mortgage process to ensure claims are justified and ensure the security of the lender is protected and calculated correctly.
Conducting research should take up most of your time when analysing your available options. Valuations are based on a number of different factors including location, state of the property and comparable statistics of other sold properties in the local area. Whilst the first two listed may be difficult to assess yourself, the last can be found using online websites like Zoopla and others that provide free valuation tools.
How to make sure your property is valued at your estimate
Before an independent valuer attends your property, they will be made aware of the valuation figure you have provided a lender. This will provide a basis for their calculations and is likely to influence their expectations.
If available, it is worth attending the valuation. Depending on the type of valuation instructed, this may not always be possible if an appointment time is not provided. This is the case for basic valuations that have more weighting on comparable factors, with only an external view of your property being undertaken as part of that process to form conclusions. Others may not visit the property, and rely heavily on online systems to do all the hard work for them.
By telling the valuer about similar properties to yours nearby that have sold, this will add weight to your justification for a particular valuation. Recording at least three is common to support any figures generated, but remember to focus on properties that have sold as opposed to asking prices of currently advertised properties.
What if the property is valued less than my estimate?
From time to time, differences between expected and actual valuations may occur. Whilst small inconsistencies should be expected, the problem only arises if it pushes your LTV above the ceiling for that particular product. Where this happens, the lender will likely offer an alternative product if available.
Before accepting a different product, be sure to research what is available with other providers. They may have been the most competitive for one LTV band, but this is not necessarily the case for another.
What if the property is valued at more than my estimate?
This is a much rarer care, but certainly not unheard of. It is more common for homeowners to over-value their property due to the emotional attachment they have. If the value is high enough, it could push you into a lower-priced product via a lower LTV band. As before, the current lender may no longer be the most competitively priced and therefore you should look at what others are offering.
If you find yourself in this situation, avoid cancelling the first application unless another one is agreed watertight. Just because a difference in valuation occurs, it does not mean another lender’s process will yield the same results.
Boosting your chances of getting the best mortgage
The major triggers that caused the collapse of the housing market was homebuyers’ inability to keep up with their mortgage payments amongst falling property prices. This created a large issue of panic selling with many properties with mortgages seeking to reduce the negative equity they were suffering.
In an attempt to mitigate the risk of this behaviour happening again in the future, lenders are now far more wary of to who and what they lend, with mortgages being the largest loans someone is likely to take out in their lifetime. In April 2014, the UK regulator the Financial Conduct Authority (FCA) went one step further by introducing affordability checks as opposed to ‘self cert’ mortgages and simple ‘rule of thumb’ approaches that were previously used such as multiples of regular income.
The Mortgage Credit Directive introduced by the EU further set these measures in place. To obtain a decent mortgage, you are now required to have a good credit score and meet a lender’s own bespoke criteria. Not all lenders will view your application in the same way, but there are a few things that can be done to improve your chances of being accepted.
Improve your credit score
Taking the time to improve your credit score can take some time. Usually starting months before starting the application process is the best way of minimising the risk of being rejected by a lender.
The aim of the lender is to ensure you will be a profitable customer and are able to make your repayments on time. This is assessed through credit scoring which tries to predict your future behaviour, based on your past financial history. The exact criteria a lender is looking for is not formally published, making it impossible to know exactly what the lender wants. However an experienced mortgage adviser will have a better idea of knowing the criteria of many of the more commonly known lenders.
If you have an adverse credit history, in today’s world you will almost certainly be rejected. With a growing number of applications for lending being received along with stricter controls to assess affordability, lenders are in the position where they can select the very best, leaving many more without funding.
Borrowers are often scared of looking at their credit score that they dare not know what is on their file. Since knowledge is power, understanding what information is stored can unlock ways in which you can improve, but may also provide comfort in that your file is sufficient for most applications in some cases. Any issues that may be present need to be rectified, which can be done by contacting the agency directly.
Due to the difficulties faced regarding the exact criteria a lender is looking for, many turn away from credit scoring due to a lack of understanding. What is common among lenders however, is that the credit score is used in some weighting to assess applications received.
Each lender has its own bespoke methodology to help assess applications, but it would be wise for anyone looking to obtain credit in the near future to take a look at their file. Since this information is free to view, the benefits of doing so are also increased.
Below is an outline of some of the main tips you can put in practice to improve your credit score over time.
- Be on the electoral roll – It is simple to register to vote if you have not already. Just simply visit (GOV WEB). For individuals who are ineligible to vote (foreign nationals mainly) you are able to add a note to your credit file stating you have other methods of proving your address and residency.
- Check your credit file – Obtain copies of your credit file from the three leading providers of this information – Equifax, Experian and Callcredit. Copies are free of charge with most providers. There are a number of premium packages that agencies try to sell. Signing up can be avoided easily. After obtaining these documents, check your file for any errors that may have been misplaced. If you believe your file is wrong, you can ask the lender to correct it. If they appear unwilling to do this initially, you can submit a notice of correction explaining your reasons why you think it is unfair and how the circumstances arose. If you feel the credit reference agency is not helping, you can complain directly to the Financial Ombudsman.
- Check addresses on your file – Often we have bank accounts we no longer use, and throughout our lives we move address. This is common when moving away for university. Check that everything on your file is up to date to provide consistency when a check is made. Any discrepancies can sending unwanted, and sometimes unnecessary warning signals to lenders.
- Break with past relationships – If you had any links with an ex or flatmate via a joint account, contact the credit agencies asking to be de-linked. This prevents their credit history impacting on your applications going forward.
- Build/Rebuild your score – If you have a poor credit score, one way to help rebuild it is by using a credit card and spending on it each month. This proves to potential lenders that you are responsible with your borrowing. This is a useful method provided you commit to clearing the balance each month as and when payment is due. If your rating is not sufficiently good enough for a normal cards, there are alternatives such as Vanquis that provide credit to those looking to rebuild their scores.
- Time your mortgage application – Previous issues such as county court judgements (CCJs) for unpaid bills are wiped from your record after six years, so it may be worth waiting until after this period of start the mortgage process. Applications only stay on your file for a year, so if you have multiple ones in place (i.e. for lots of credit) then wait. If keen to progress with a full application, a specialist lender will likely look at your application on its merits although the fees and interest rates charged will be higher.
- Avoid missing payments – Setting up a direct debit is an ideal way to pay at least the minimum repayment on credit cards so you are never late or forget to pay a bill. It is always better to repay as much as possible, so making additional manual overpayments when appropriate can help clear any outstanding debt quicker.
- Minimise applications before a mortgage – Any form of application no matter how small or large will be stored on your credit file. This includes car insurance and mobile phone contracts. If you apply for credit multiple times within a short period of time, it shows that you may be desperate and could have an adverse effect when it comes to going through the mortgage process. Prioritise you mortgage and hold off any others until after you have been accepted and the process completed.
- Never withdraw cash on a credit card – This is noted on your file and is an incredibly expensive method of getting access to cash. It appears as though you are desperate and unable to live within your budget.
- Never apply after rejection – As well as checking for errors before making an application, this should be a continuous process of new information is stored on a regular basis. Even if able to fix these errors at a later date, previous rejections that may have resulted from these errors can not be retrospectively adjusted. This will affect future applications if you seek credit soon after being rejected.
No longer is it possible for lenders to simply check your credit score against their minimum criteria, and multiply your gross salary by four to arrive at a loan amount. With increased affordability checks in place due to legislation by both the FCA and European government, lenders are now required to ensure any mortgage approved is affordable for the applicant even if the marketplace were to change from both a property and interest rate perspective.
- Mortgage brokers can help increase acceptance – Using a mortgage broker can be highly beneficial to help find the right deal. Their experience with dealing directly with lenders on a daily basis means they more often than not have information not available to individuals opting to tackle the process themselves. This includes the lenders’ credit and affordability criteria. The application process can be achieved in significantly less time with the broker matching you with the right deal.
- You will need proof of income – Previously it was possible to ‘self cert’ your income to lenders. No longer is it possible for lenders to take your word at face value, with these mortgages being outlawed in 2014. Proof of income will include regular payslips to demonstrate your salary being earned each month. In addition, bank statements must be provided to show any outgoings over time with three months often being requested.
- Scrutinise your bank statements – Taking a thorough look through your statements can help highlight any red flags that a lender may question you on. Examples include charges for going overdrawn. You will be required to list your outgoings to the lender which will be compared with your statements so consistency is key.
- Be prepared to explain yourself – Where there is an unusual transaction in your statements, expect the lender to question you about it. Therefore if you can proactively highlight any concerns that may be raised, then you will also be able to have an adequate explanation on hand to prevent getting refused. If you have a monthly standing order payable to a friend, the lender will want to know what it is for.
- Calculate your disposable income – Work out how much you have left available at the end of the month. The larger this figure, the more comfortable the lender will be in accepting you as a healthy risk. Having spare cash shows that if interest rates were to rise, you would still have money available to cover this increased cost.
- Undertake a budget overhaul – Three months before starting the application process, you can take additional steps to boost your budget available each month. By minimising your spending and potentially increasing your income each month through overtime, this activity will show up on your account statements. Unnecessary costs can be cut including unused subscriptions and although overtime is not guaranteed, it can demonstrate willingness to a lender to earn money.
- Ensure it is affordable going forward – New stress testing means lenders must ensure any mortgage product offered is affordable even if interest rates were to increase. This is where higher disposable incomes can help considerably. The current level needed for stress testing is 3% above the current interest rate (base rate) set by the Bank of England.
It is vital that individuals are able to afford their mortgage, and the criteria is most useful for those who are new to the process – i.e. first time buyers, who may not have a full understanding of the process and what is involved.
Disputes are often raised over the reliance on affordability checks on existing mortgage holders who are seeking to remortgage to improve the deal they have in place. The situation is where the applicants have suffered no change to their circumstances and are not looking to borrow any additional funds.
The interpretation of the EU Mortgage Credit Directive that come into force in March 2016 (along with the transitional arrangements made beforehand) means that some are arguing that these checks are being enforced too strictly.
Many applicants have been and are being rejected for remortgage deals due to failing affordability checks by being told they can not afford a cheaper mortgage. The net result is that many are forced to remain on a more expensive product, which increases the risk of default and repossession, exactly what the rules are supposed to prevent.
Whilst those who have adverse credit histories or a lack of consistent income or equity have always been rejected, this legislation is now breeding a situation which demonstrates the opposite of what is supposed to happen is indeed occurring.
With affordability checks covered, applying interest rates of 6-7% does not seem sense when their existing interest rate is much less (and deemed affordable) and they are simply looking to swap products to cut overall interest rates paid. If you are looking to remortgage and are suffering from this problem currently, a mortgage broker will certainly be able to assist you.
Additional tips to boost acceptance
- An additional £100 can mean acceptance
With automated systems in place to aid lenders assessing acceptance, reducing the amount of borrowing by 0.1% can lead to a disproportionately higher chance of being accepted. This is especially the case with values close to key LTV boundaries. It may also reduce the amount of paperwork and documentation that the lender will request from you.For example, if you are applying for a 75% maximum LTV loan on a £100,000 property, and your equity is £25,000 you may benefit from putting down an extra £100. That extra 0.1% on your deposit could see you speed up and ease the application process.
- Stay out of your overdraft
If you consistently use your overdraft, this could be viewed as living close to the edge of your finances. Some lenders may reject your application if you have used an overdraft within the previous three months from submitting your application. If you are using an overdraft, consider switching it to a 0% money transfer credit card.
- Avoid payday loans altogether
These loans indicate poor money management and many lenders will reject anyone who uses these loans. If you have a history of using these forms of credit, provided they are fully repaid and sufficient time has passed it is possible for this to not affect your chances of acceptance.
- Close unused accounts
If you have lots of unused credit available, this may not be seen favourably by lenders as you have the ability to borrow significant sums of money quickly without any checks. Active cards and accounts are therefore not always positive for your credit history.By contacting the companies involved to close down these accounts, you will be able to demonstrate that you are not able to get into debt easily. Examples of these accounts include current accounts that contain no funds, and have an overdraft facility, or credit cards that have available credit and are also not used.
- Savings can get you a better mortgage
Deals tend to get better at every 5% LTV threshold from 95% down to 60%. Therefore using available savings no matter how small can contribute towards allowing you to get a better interest rate on your mortgage. Imagine you have a £150,000 property and want a £137,000 remortgage.This works out as a 91% LTV and the top 5-year fixed is 4.49% at the time of writing. However, by using £2000 of savings you would be at 90% LTV and eligible to reduce the interest rate you pay down to 2.88%. This results in a saving of over £1550 per year in payments.
What paperwork is required?
Before completing the mortgage application process, a lot of information needs to be in place. It is worth spending some time to make sure everything is in order to prevent any unnecessary delays. Below is an outline of the main documents you will need, but if you are unsure contact your mortgage broker or lender ahead of time.
- Proof of income – Often this will be your last three months’ payslips, or if you are self-employed, your accounts for the past two or three years.
- Bank statements from the last three months.
- Proof of any commissions or bonuses that have been earned to help support your application.
- Your latest P60 tax form which shows your income and any tax paid from each tax year.
- SA302 tax return forms mainly if you are self-employed. These are copies of your self-assessment tax return, which lenders may want to see. These can take weeks to get from HM Revenue and Customs, so it is worthwhile asking for these well in advance.