Six steps to getting the best mortgage deal
News today that the Financial Services Authority (FSA) is proposing a series of major reforms in the mortgage market should come as little surprise. Questionable mortgage lending practices might not have been the root cause of the recent global banking crisis, but they were certainly a contributory factor.
A crackdown on reckless lending along with the future need for both income and expenditure verification to ensure affordability should in itself make mortgages no less accessible. Those who have ‘inflated’ their incomes in the past to obtain high real income multiples on self-certification mortgages will struggle to do the same in the future, but for the majority of borrowers it will (eventually) be business as usual.
My contacts in the mortgage world tell me that mortgage lending remains both patchy and expensive. As the banks continue to rebuild their balance sheets, they remain loathe to dish out the dosh as freely as they were doing in recent years. Yet mortgages remain available to people with reasonable size deposits, a good credit history and realistic expectations about borrowing levels.
Whether you are a first-time buyer or simply looking for a competitive remortgage deal, here are our six steps to getting the best mortgage:
1 – The bigger, the better (when it comes to deposits)
Big mortgages on low incomes might be a thing of the past, but size really does matter when it comes to your deposit. When this credit crunch started, average deposit requirements shot up quickly. Gone are the days when a 5% or 10% deposit will give you access to the best deals in the market. Lenders today are looking for serious commitment from borrowers in terms of a big deposit.
Whilst saving for a bigger deposit might take longer and be less fun than spending the money on other things, it does benefit you in some others ways as well as getting you access to favourable rates. It means you have to borrow less. During these times of relatively low interest rates (which have not necessarily filtered through to mortgage interest rates, yet) this might not be much of an issue. But when rates start to go back up, you will be glad of a smaller loan.
Secondly, a bigger deposit gives you more of a safety net should house prices fall again. There are some indications that the UK property market has stabilised a bit in recent months, but there is no guarantee that it will be all smooth sailing from here. Think of your deposit as a buffer between equity and negative equity. The bigger, the better.
2 – Keep it clean
Banks and other mortgage lenders price their products based on risk. Someone with a clean credit history represents a lower risk to a mortgage lender than an applicant with a record of missed loan repayments and maybe a County Court Judgement or two thrown in for good measure. With a limited supply of cash to lend, guess which borrower is most likely to be on the receiving end of a competitive mortgage deal.
Your credit rating is extremely valuable. Wrap it in cotton wool and do everything you can to keep it clean.
The first step to ensuring a good credit rating when getting a mortgage is checking your credit file. You can do this with any of the main credit reference agencies, including Equifax and Experian. Checking your file at least once a year is good practice even if you are not applying for a mortgage. Use this exercise as an early warning system to spot fraud, including other people taking out credit in your name.
3 – Get independent advice
The mortgage market today is much smaller than it was at its peak, but it still pays to shop around. You can do this yourself if you have the time on your hands and the financial experience to compare different deals. Alternatively, you can engage the services of an independent mortgage broker.
Some brokers offer mortgage advice for ‘free’ (they receive a procuration fee from the mortgage lender, paid out of charges, when they place the recommended deal) but increasingly they charge a fee for this service. This is partially because many lenders now offer their most competitive deals directly to the public, to cut out the expense of the middleman. This makes sense in a restricted lending market where the demand outweighs the supply. Paying a fee for mortgage advice will ensure that the broker acts in your best interest, recommending a direct deal if most suitable, even though they will not receive a separate procuration fee.
4 – Think about the future
When you get a mortgage, it is easy to focus on the first year or two. It is equally as important to think longer term and consider what will happen in year three and beyond.
Something typically happens to your mortgage interest rate once the introductory offer expires, and the direction of travel is usually up. This leaves borrowers with a couple of options – either go through the expense of remortgaging to a new deal with the same lender or a new lender, or stick with a more expensive interest rate where you are.
Given the FSA proposals on restricting self-certification of income in the future, I imagine that some people who took advantage of this loophole in the past will now find themselves effectively trapped in their current mortgage product for a long time. The mortgage market can change at a rapid pace, so never assume that you will simply be able to remortgage to another lender and another deal in a few years time.
5 – Consider the total cost
The cost of a mortgage is more than the interest rate on display. Always consider the total cost of a mortgage, which includes the arrangement fee.
Many cheaper looking mortgage deals now come with hefty arrangement fees, often in excess of £1,000 for the cheapest interest rates. This pushes up the total cost of borrowing, particularly in the early years.
When taking out a mortgage there is a trade off between a low interest rate and a low arrangement fee. Sadly it is now rarely the case that both will be low within the same product. Mortgage lenders need to get their profit from somewhere.
6 – Club together
If finding a good mortgage deal continues to be elusive and your dream property remains just out of reach, remember to consider all of your options. Your borrowing power could increase if you team up with someone else to buy a property.
Assuming you do not have a close friend, relative or work colleague who you want to live with, there are plenty of ways to find a suitable co-buyer. A number of websites have sprung up in recent years to make the task of finding a mortgage buddy even easier.
Joint ownership is something to consider carefully and you should always seek professional advice from a solicitor who specialises in property law before signing contracts. Do not let the prospect of becoming a home owner cloud your better judgement. As well as having to live with the other person, you will also have a major asset and liability to share. It’s an option, but take your time to make a big decision like this.
Martin Bamford is site editor of BrilliantWithMoney and a Chartered Financial Planner at Informed Choice. You can follow him on Twitter @martinbamford.
