What does it really take to get a mortgage?
Everyone knows that, since the start of the credit crunch, getting a mortgage has become far more difficult than before. But what does it really take to get a home loan right now?
If you're ready to put your first foot on the property ladder, or are in need
of a new mortgage deal, no
doubt you're wondering about your chances of getting the finance you need.
In this article, I'll look at what it's likely to take for most people to get a mortgage in the current climate - and offer some practical tips on how you can help yourself get closer to your goal.
1. A sizeable deposit
Since the start of the dreaded credit crunch, mortgage lenders have demanded bigger deposits from borrowers.
While I think most people are aware of this change, the statistics truly are shocking. According to recent research by Moneyfacts, the financial data firm, borrowers now need to find a deposit three times higher than they would have needed two years ago.
The average loan to value (LTV) ratio of available mortgages has declined from 91% in August 2007 to 74% today. This means that, on an 'average' £150,000 mortgage, a borrower would now need to put down £39,000. That is an extra £25,500 more than would have been required before the credit crunch!
In other words, most first time buyers will have to find 25% of their property's value up front if they want to get an affordable mortgage.
There are a very small number of lenders offering 85% and 90% LTV deals, but these mortgages tend to be significantly more expensive.
Top tips:
- Many first time buyers now seek help from the Bank of Mum and Dad when trying to amass a deposit. If you're planning to do so, make sure everyone is aware of the possible risks this could entail.
- If you're working hard to save up a deposit for your first home independently, make sure your money is earning a competitive rate of interest.
- If you're looking to get a home loan but have only a small deposit, the assistance of a mortgage broker could be invaluable in helping you locate the right deal.
2. A substantial equity stake
Even if you are already a home owner, the restricted mortgage market and shrinking house prices may mean you find it more difficult to remortgage.
According to Moneyfacts, the number of fixed rate mortgages available to those with just a 10% deposit or equity stake has dropped by 83% since 2007. By comparison, the number of deals for those able to put down 40% of their property's value has increased by a staggering 2244%!
As with first time buyers, the more equity you have in your home, the more affordable any remortgage you are eligible for is likely to be.
Sadly, if house price drops have left you with little or no equity in your home, you will probably struggle to remortgage at all in the current climate.
Top tips:
- If you're concerned about how much equity is left in your home, you could consider overpaying your mortgage. This should help you fight the effects of falling property prices by building up your equity stake - but always check with your lender that overpayments are allowed.
- Don't forget it is usually possible to book a mortgage deal up to six months in advance of needing one. If you're worried your equity stake is shrinking, it may make sense to do this now.
3. A strong credit rating
Lenders' demand for larger up front deposits from borrowers is down to their altered attitudes to risk.
Nowadays, banks and building societies are extra careful about who they lend to because they cannot afford for customers to default on their debts.
Therefore, even if you're a higher earner with a decent deposit, you'll need a good credit rating in order to qualify for a market-leading mortgage.
Top tip:
- If it's been a while since you looked at your credit file or you think your record is less than spotless, I'd urge you to read this article and this guide to improving your situation.
4. An affordable property
In the days of mega mortgage lending (a mere three years ago!) it was possible for first time buyers to borrow mortgages equivalent to five or six times their yearly earnings. 100% and 125% mortgages were also widely available, meaning that home buyers could purchase property which - under different circumstances - would have been impossible for them to afford.
Fast forward to 2009 and high LTV mortgage lending has all but disappeared. In addition, few lenders are now willing to offer individuals or couples mortgages of more than three and a half to four times their salaries.
Affordability calculations - the sums done by lenders to work out how much money they are prepared to let you borrow - now seem stricter.
Be aware that any mortgage lender you apply to will take into account your financial commitments (such as credit card or loan repayments) as well as what you earn when deciding whether to offer you a loan.
Top tips:
- Be realistic about the sort of property you can afford when looking for a first home.
- Prioritise paying down outstanding debts in preparation for applying for a mortgage.
5. Help from friends, family - and maybe a professional
Finally, if you're buying a property for the first time, it's a good idea to seek support from your nearest and dearest. Making decisions such as whether to go for a fixed rate mortgage, a tracker deal or an offset mortgage can be overwhelming and difficult, so talking with people who've been through it before should help.
Crucially - and whether you're looking for a first time buyer mortgage or a remortgage deal - you may also want to consider consulting a mortgage broker for advice.
He or she will be able to help you hunt down the mortgage deals that are best suited to you, comparing them based on rate, fees and the terms and conditions attached to each product.
**Articles featured on BeatThatQuote.com are for information purposes only and reflect the views of individual writers. Articles are not, and should not be considered as, financial advice. BeatThatQuote.com strongly encourages our readers not to rely solely on information contained within this article/our website, but to conduct their own research and seek independent advice about the financial products they purchase.**
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