This chapter gives you a detailed explanation of the first steps in buying property with information about:
- Which mortgage is best and the importance of researching the market
- What to watch out for when using online comparison sites
- Whether to use a mortgage broker and their advantages and disadvantages
- How much you can borrow and your mortgage repayments
- What a DIP (Decision in Principle) is
- When you should apply for a DIP
- How to apply for a DIP
- Finding the right home
- Where to find properties for sale
- Tips for house-hunting
Your first steps when applying for a mortgage
Once you’ve saved as much money as you can for a deposit and researched the mortgage market so you know what kind of mortgage is best for you, it’s time to move onto the next stage to fulfil your dream of owning your own home.
This chapter deals with finding a mortgage and asks the question: should you use a mortgage broker? We weigh up the advantages and disadvantages of consulting a professional about which mortgage provider will offer you the best deal for your individual circumstances. We’ll also inform you of which things to ask the mortgage broker and how their payment is arranged. We then consider which information is necessary so a lender can grant you a DIP (Decision in Principal) before listing what factors you should take into account when choosing your future home.
Which mortgage is best? – Researching the market
Before you start researching the market, you should have already done your homework and know all about the different mortgages available and their pros and cons. A good place to start is by asking family and friends their advice but bear in mind that mortgages are complex financial products and what is best for them isn’t necessarily the best for your own circumstances.
Think about the pros and cons of using the financial institution where you have existing accounts. Having built up a relationship with you over the years, they know your financial situation. Also, many offer exclusive and preferential rates to existing customers. Having said that, mortgage provision is a cut-throat business and this doesn’t mean you can’t find something better with another rival lender.
Using online comparison sites – Be careful!
There are a number of online comparison sites which can give you an idea of what’s being offered but be sure to use more than one since it’s impossible to include every single mortgage on one site. Also, don’t use the APR as your sole basis for comparison. The APR is a calculation of the average annual interest rate if you kept the same mortgage provider for the duration of your 25-year loan. The chances are that you’ll re-mortgage at least once during this period and the lender’s SVR is sure to change in this time too. Instead, compare using the average interest rate during your initial incentive period.
Other factors should also be taken into consideration. The seemingly cheapest mortgages often have the most expensive arrangements fees added to them so that might end up costing you more in the long-term so look at the bigger picture.
Mortgage providers often try to attract first-time buyers by offering extras such as cash-back schemes.
Finally, mortgage providers often try to attract first-time buyers by offering extras such as cash-back schemes or a contribution towards your legal costs. Of course this might save you some money but think about whether this help comes at a cost to the terms of your mortgage.
Should I use a mortgage broker?
Whether to use a mortgage broker is entirely up to you since it has both advantages and disadvantages – let’s look at them in more detail so you can make an informed decision.
What are the advantages of using a mortgage broker?
One of the advantages of hiring a mortgage broker is that they are professionally-trained experts who can use their knowledge and expertise to scour the best possible deal for your individual circumstances: your deposit, earnings, future plans, etc. This is crucial when you and/or your property is considered non-standard from the lender’s point of view. For example, because you work freelance, have a poor credit rating or your property is a conversion or has unusual features such as a thatched roof.
Mortgage brokers can save you a great deal of time and of course make the experience of buying property so much less stressful. They’ll be able to advise you of which lenders to approach as they know their criteria. Not only will applying for a lender who will reject you be a waste of time but their credit search will leave a ‘footprint’ on your file. Too many credit checks in a short period of time could raise a red flag for lenders and have an impact on your chances of getting a mortgage.
Brokers could also help you find better deals than approaching the lender directly and explain the pitfalls of attractive mortgages with hidden costs. Finally, they could guide you through the application process and use their contacts to find out what’s gone wrong if there’s an unexpected snag.
In order to find the best mortgage, you could start by asking family/friends, consulting your own bank/building society or by using online comparison sites.
Be aware of the limitations of using online comparison sites and using the APR as a basis for comparison.
You should consider the interest rate for the initial term of the mortgage and be careful of special offers from the mortgage provider at the expense of the final cost of the mortgage.
Consulting a mortgage broker has many advantages which will make a home purchase easier, faster and less stressful for you.
The disadvantages of using a mortgage broker
One of the drawbacks of consulting a mortgage broker is that they don’t necessarily advise on all the mortgages on the market. Some consider the whole market, some are tied to specific lenders whilst others might recommend from a limited selection. Although this is something that should be made clear in their ‘Initial Disclosure Document’, you should ask their limitations before hiring them.
To limit their recommendations even further, some mortgage providers – especially some of the big High Street lenders – won’t deal with intermediaries but only their customers. Their viewpoint is that their working relationship with you makes them the best ones to guide and advise you. This exclusion of lenders could mean that you miss out on some of the best deals.
Some brokers are free because they receive a commission from the lenders but this might limit the range of markets they consider.
Another disadvantage of using a mortgage broker is that you may have to pay fees. FCA regulations stipulate that their disclosure document should also include details of their charges (if there are any) and how this amount is calculated. For example, a set fee, hourly rate, etc. Some brokers are free because they receive a commission from the lenders but this might limit the range of markets they consider. If you do have to pay, their fee could be added to the mortgage but you must give your consent. Bear in mind that you’ll pay interest on any extra sum added to your mortgage.
Questions on mortgage applications
According to Equifax, a credit score of 420 or above is considered good. With a credit score of 420 or higher, mortgage lenders should face no difficulty to approve your mortgage application, as this is higher than the score of 380 which is the UK average. While Equifax ranks credit scores between 0 to 700, other credit reference agencies have different scoring schemes.
When deciding to proceed with your mortgage application, you will be required to supply fairly extensive documentation that relates to your personal and financial circumstances. You will need to supply utility bills, proof of any benefits received, a P60 form from your employers, your payslips from the last three months of employment, your passport or driving license in order to prove your identity, as well as bank statements of your current account for the last three to six months.
Generally, lenders will require you to have been employed by the same company for three years before approving your mortgage application. However, in some cases, mortgage lenders can be satisfied if you can show at least 3 months of employment. This will largely depend on the mortgage amount and mortgage type, as well as the particular lender that you are dealing with.
How much can I borrow?
At this stage, from your own research or from the input of the mortgage broker, you really should have an exact idea of how much you wish to borrow. There are many mortgage calculators on the internet, which can give you an indication of how much this sum would break down into monthly payments. Your mortgage repayments shouldn’t be more than 35-40% of your net monthly income. If it works out to be more, you should re-think the mortgage deal you’ve chosen or think about shelving your plans until you’ve saved more towards the deposit.
What is a Decision in Principal (DIP)?
Also known as an AIP (Agreement in Principal) or MIP (Mortgage in Principal), a DIP is a certificate or statement from a lender indicating how much they would be prepared to lend you, on what terms and based on the information that you’ve provided regarding your circumstances.
Your DIP (or lending certificate) is no guarantee that you’ll be given a mortgage since a mortgage provider will go through your circumstances more thoroughly when you make your official application for a loan. On the other hand, you’re under no obligation to take out a mortgage even after you’ve received a DIP.
When should I apply for a DIP?
You really should apply for a DIP as soon as you feel your finances are ready to take out a loan. In other words, you have a deposit ready and have set aside all the money necessary to pay the additional costs of buying property. At the same time, you ought to have made a start researching the property market in the area you’d like to buy and be ready to start viewing houses. The DIP can be submitted at any time during the process of applying for a mortgage although timing is key.
One benefit of receiving a DIP is that you reassure yourself that there are fewer chances of unexpected hitches when you want to apply for a mortgage later. Another advantage of having a DIP in hand when you look at property is that estate agents and vendors will know that you’re committed and in a position to buy property. It will also save you a great deal of time later – it would be a pity to miss out on the home of your dreams just because there are delays with the financing that need time to sort out.
There are a number of provisions, however. Some lending certificates stipulate that they’re only valid for 90 days so don’t make the mistake of applying too soon. Also, the mortgage market is continually changing; you could find a better deal elsewhere if you’re in too much of a hurry. If your DIP becomes invalid, you’ll have to go through the procedure all over again and you really should avoid too many credit checks in a short period. Alternatively, you could ask your lender if they would do a ‘soft’ (or quotation) check, which leaves no imprint on your credit file. However, very few lenders have a policy of doing this.
The drawbacks of using a mortgage broker are that some of them exclude some lenders and you may have to pay a fee for their services.
A Decision in Principle (DIP) is a statement which certifies your suitability for a mortgage without being an ironclad guarantee.
Receiving a DIP means you reassure yourself and others of your eligibility for a mortgage and it saves a lot of time.
Don’t hurry to apply for a DIP as they may be limited in their duration and you might miss out on better deals later.
How to apply for a DIP
Once you’ve chosen the right mortgage deal to suit you and are ready to apply for a DIP, you could make arrangements alone or with the help of your mortgage broker. This can be done online, by phone or by booking an appointment at a branch of the bank or building society. There are no fees to pay for this service and you’ll usually have a reply quite quickly – within a few days.
In order to process your application, the lender will need some information from you to run an affordability check in order to calculate the amount they’d be prepared to lend you. This includes: your address history, proof of income (e.g. your last 3 payslips and your most recent P60) and proof of your outgoings (e.g. bank and credit card statements and recent bills).
Finding the right home
Buying isn’t the same as renting; you may not be intending to stay in the house for the rest of your life but deciding you dislike it after a short time and wanting to move can be a costly mistake since you’ll have to go through the whole process again and pay all the fees. Choosing the right home is an extremely personal choice and what suits you might not necessarily suit someone else. Despite this, there are a number of factors to take into account when choosing the right home.
This is the main factor to bear in mind; you must stick within your budget. You can’t look at property which is too expensive and hope you’ll be able to haggle the vendor’s price down. If you make an offer higher than your expected financing, you’ll have to make up the shortfall or find yourself struggling to make the mortgage repayments. In that case, your dream home will quickly become a nightmare.
Features of the property
You may have a picture of what your ideal home will be like but you may have to compromise a little when you buy your first home because of budget restraints. Prioritise what it is most important to you whether this is a garden, a garage or a spare bedroom. Try to think long-term. For example, if you’re planning to start a family in the next few years will the property be big enough for a growing family?
New-build vs. older property
The advantages of purchasing a new-build are that you don’t have to worry about maintenance or major renovation work after your purchase. If the developer is registered with the NHBA (National House Building Association), you’ll have a 10-year warranty. Also, new-builds are guaranteed to be up to 40% more energy-efficient then older properties saving you a fortune on your bills.
On the other hand, some people dislike the uniformity of new-build housing and would prefer something more individual which would give them the scope to put their stamp on the property by making changes. Could you afford to do some building or renovation work? Often older properties hold their value much better for re-sale so they make a better investment.
Arranging a DIP can be done online, by phone or in person and your mortgage provider will need details of your income and outgoings to do an affordability check.
Choosing a home property isn’t the same as a rental and is an intensely personal choice.
There are a number of common factors to take into account before house-hunting and these include: affordability, features of the property and whether to buy a new-build or older property.
Leasehold vs. freehold
Leasehold means that you have the right to use the property for a set period of time often in return for paying ground rent to the freeholder. By contrast, freehold means that you own the property and the ground that it’s on outright and there’s no ground rent.
If you’re planning to buy leasehold, your solicitor should check when the lease expires. Renewing the lease can be a lengthy – and expensive – procedure.
The location of the property
Some home buyers choose the location (the neighbourhood or the village) before they even start thinking about the features of the property because you can adapt or renovate a home to reflect your tastes but you can’t physically move it somewhere else!
You may have an approximate location in mind based on the proximity of your workplace and/or family but there are other things to bear in mind. Think about facilities and amenities. Is there access to public transport if you commute? What about shops, parks, a local cafe or pub? Your list of priorities will depend on your personal circumstances, interests and hobbies. However, think to the future too so the property is one you can grow into. If you’re planning a family, what are the local schools like and how near are they?
If you’ve narrowed your choices down to a particular area, spend some time there getting a ‘feel’ for the place. Talk to locals, read the local newspaper and think about how the area may change in the future. Check to see if any developments or transport links are planned there in the future since these will affect how much your property will increase in price. Are there signs of gentrification? For example, the opening of trendy galleries or eateries are always the first sign at a grass-roots level that an area is going up and property prices are ready to increase.
Where to find properties for sale
Now that you’ve prepared a mental check-list of what kind of property you want to purchase and where (leaving room for compromise), it’s time to start house-hunting.
An obvious place to start is local estate agents but don’t forget to view the numerous sites online with property for sell. You can enter your preferences and price range to narrow the search down even further. Also, buy a local newspaper to see properties for sale and check if there are any property developers in the area if you’d like a new-build.
Tips for house-hunting
Remember that the estate agent works for the vendor and never reveal your maximum price. On viewings don’t be overenthusiastic about a property and don’t feel pressurised by the estate agent to make a hasty offer because of other would-be buyers. When you view properties, it might be a good idea to keep notes of each property (or ask permission to take photos) so you can keep a clear picture of each one’s pros and cons. It’s very easy to get confused when viewing many properties in rapid succession.
Remember that the estate agent works for the vendor and you should never reveal your maximum price.
Hopefully, you’ll soon find the property which appeals to you and meets most of your criteria. You’re then ready to take the next step – making an offer for the property.
Whether the property is leasehold or freehold and its location are two other factors to take into consideration when looking for homes to buy.
Estate agents, online sites, local newspapers and property developers working locally are all places to start house-hunting.
When viewing properties don’t show your enthusiasm and never reveal your maximum price to estate agents.