Applying for a mortgage?
Be prepared to answer 7 main questions.
Less than a decade ago, a few payslips and a meeting with a bank manager were all you needed to get a home mortgage. But in 2014 new stricter rules were introduced that made the process much harder.
Now would-be borrowers must spend hours answering detailed questions about their spending habits, debts and plans. Complex "affordability assessments" will determine whether the bank thinks a borrower will be able to repay the loan, leaving customers with a nervous wait to see whether they can receive the funds from their mortgage provider.
It is not just first-time buyers who must jump through these hoops; customers looking to remortgage to a cheaper deal elsewhere are also subjected to this forensic analysis.
Borrowers must not only prove that they can afford to pay the monthly mortgage payments, but that they potentially can also cope with significantly higher repayment should the base rate change. Even if a borrower is taking out a residential mortgage at 2% per annum, they will be stress-tested by banks at 4 percentage points above the standard variable rate, which is the rate borrowers will be charged after the initial loan period expires.
This has created the perverse situation where some borrowers have been told they cannot pass an affordability test, even though their existing mortgage has higher monthly payments. These people, trapped on the mortgage with their current lender, have been dubbed "mortgage prisoners".
The vast majority of mortgages are sold on an advised basis. This means the customer must use a specialist mortgage broker, a financial adviser, or a bank's own staff member to advise them on the terms and conditions. This adviser will note down all their income and expenditure and try to find a suitable mortgage product. This process will include asking whether an applicant has high-interest consumer loans or credit cards, whether they gamble regularly and if they are planning any significant life changes in the future such as leaving or changing their current job. There are some exceptions for high net worth individuals, but the vast majority of people should expect to answer in-depth questions on their financial life and spending habits.
We have rounded-up the major questions borrowers should be prepared to answer, before applying for a residential mortgage.
The key questions
How much money do you earn?
Your salary is one of the most important factors lenders use to assess how much money you can borrow. The maximum lenders tend to let you borrow is four and a half times your gross salary. Those who work part-time, shifts or are self-employed are considered more of a risk than people who have a full-time job. Standard mortgage applications require a two-year work history. But many banks will consider applicants who work at least 6 months in their current role. You will also need to provide details of any bonuses you earn or any regular overtime that boosts your income.
Do you have any debts?
Strangely enough, lenders prefer to see that you have debts - as long as you're paying them back on time. This shows that you can be trusted to borrow money and honour your repayments. Lenders tend to worry when the amount of debt you have almost reaches your limits, such as maxing out your credit cards or overdraft. They will also want to know how much your minimum payments are because if they're expensive, it may look like you can't afford mortgage repayments on top. Having no debts at all can be just as problematic. So, it's better to have a credit history in the UK before applying for a mortgage.
What are your outgoings?
Where you could simply tell a lender how much you spend on your weekly food shop pre-2014, lenders will now check what you tell them against your bank statements. Buying too many coffees from Starbucks or splashing out on a one-off shopping spree isn't going to affect your application. But they will be looking to see if excessive spending is something that is going to continue because it could be the difference between you affording a mortgage and not.
Do you have any children? Is this likely to change in the future?
It may feel like lenders are prying, but kids are expensive to care, and they want to know how your changing family will affect your mortgage repayments. If you haven't got kids but are planning to have them in the future, the lender will consider this when they are calculating your affordability.
Have you ever taken out a payday loan?
You took out a payday loan a year ago which you've now paid off. No problem, right? Wrong. Most high street lenders will flat-out refuse your mortgage application if you've taken out a payday loan because a borrower who's willing to take emergency cash with extortionate rates is too risky.
There are some specialist lenders out there who may consider lending to you, but it's best to speak to a mortgage adviser before applying because a refusal could damage your chances even further. Taking out a payday loan will also affect the rate you're offered and is likely to mean that you'll need a bigger deposit.
What's your credit history like?
Your credit history is essential to lenders who use it to assess how risky you are deemed to lend to. Any defaulted payments, and in more extreme cases if you've filed for an IVA or bankruptcy, that have occurred in the past six years will show up on your credit history. While a lender might not turn you down for this, it could affect the amount you can borrow and the interest rate you're offered. Before applying the best thing you can do for yourself is to check your credit history on www.chekmyfile.com