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De-Mystifying the Mortgage Mind

The mortgage process can seem a mystery, especially as a First Time Buyer. Here is an overview and some insight which may help.

Spending time with our customers gives us an understanding to the emotional roller coaster which a property transaction can create. We have stood in front of committed buyers, who have found their dream home, but suddenly the reality hits where they are unsure if the bank will support their aspiration.

We wanted to provide a simple guidance to some of the aspects that a mortgage lender may look at during the process. Please may we start by saying that we have found many Mortgage Managers to be helpful, encouraging, empathic and knowledgeable and while it may appear to be a daunting journey, it honestly doesn't need to be.

From a banks perspective they have two key priorities. Primarily they will want to know that their mortgage is securely protected by the quality of the asset (the home) and secondly they will want to protect both their loan repayment and yourself personally as the borrower. The bank has a duty of care to ensure that you are not over committed and that your repayments are comfortable now and in the future should we face further rate rises. The bank will not wish to expose you to a vulnerable position by creating an unsustainable repayment.

The bank will take you through a mortgage application and as you prepare for that meeting here are some things you can consider which they will review. It's interesting to note that not all banks approach this in the same way, and that is known as their underwriting approach.

Ownership: Who will own and live in the house. It is a joint or sole application. Are you first time buyers or is this a subsequent purchase. Very often there is support for First Time Buyers which will help you along the way.

Income: Basic Income will be reviewed so always handy to take in your payslips (ideally 6 months if you can). *If a joint application both of you should provide*. If self employed 3 years tax returns can usually support an average earnings. There is a variety of additional income that you may earn and depending on the bank will depend on whether they take it into consideration:

* Overtime

* Bonus

* Rental Income

* Pension

If you are on probation within a role the bank may wish to see this completed prior to offering a mortgage but it shouldn't stop you talking to them now.

Financial Commitments: Before assessing the mortgage amount that is affordable for you, the bank will complete a monthly Income & Expenditure with you, where importantly they will highlight the financial commitments you have to make in a month. This could be:

* Personal Loans

* Car Finance

* Other Mortgage Payments

* School/Nursery Fees

* Rates

* Maintenance

Deposit: The bank will chat to you about how much money you want to put down as a deposit and how you have accumulated this. It may be a lump sum, gift from a family member or it may be savings you have made over time, its important to mention if this is a loan that is expected to be repaid

Current Bank Account: The bank is potentially lending a large amount of money to you and they will want to know you are responsible when it comes to your budgeting and planning. An overdraft doesn't necessarily cause any issue, but banks would be thoughtful about you going over agreed overdraft limits, or having returned items by Direct Debits and/or Standing Orders. It is a great idea to take 6 months bank statements with you to the meeting to show you are a great customer for them to consider. If your bank accounts are not great it would be a good plan to meet with your bank and seek guidance on how you can operate your accounts in a better way (very often this is down to timing of salary and payments out - as a side tip if you haven't opened a separate bills account where all your Direct Debits and Standing Orders come from it is really worth doing)

Current Rent/Mortgage/Saving Commitments: It's a positive situation to convey to the bank that you can prove a new mortgage payment is manageable. Ways of doing this are:

* Showing your current rent/mortgage payment is similar to the new mortgage payment and that you have comfortably made this over time

* Showing your current savings commitment (towards your deposit) is similar to the new mortgage payment and that you have comfortable made this over time

Property: You might not have seen a property yet, or you may have your heart set on one. If you do know your property take the details to the bank. Going back to the primary consideration for the bank they will want to know that what they lend you is secure against the chosen property. So whilst you might see an incredible price on a house that has a lot of potential (but needs work), if you don't have substantial savings the bank may feel they are a) lending to much against the property if its difficult to re-sell or structurally unsound b) the bank may wonder how you are going to fund the improvements. This is where the bank will consider something called Loan to Value, and they will have internal guidance around what the right Loan to Value is for the amount you wish to borrow, and for the condition of the property.

Your Age Profile: This is important as it will determine what length of time you can take the mortgage over. The bank will likely have a maximum age of what they will lend to. It's worth noting that just because you can take a mortgage over 30 years, you shouldn't necessarily do so and there is an article here which talks to that a little more.

Rate/Stress Testing: When it comes to calculating your monthly repayment the bank will look at the amount you wish to borrow and the rate you wish to select (a whole further article to follow on what to think about in your mortgage product).

Stress Testing means that they will add % onto the chosen rate to calculate if we experienced a rate rise could you still afford the monthly payment. This comes back to protecting you as a customer and not putting you in a vulnerable position in the future.

Considering the factors above how do the bank pull this all together to make a mortgage decision? Not wishing to over simplify but fundamentally as a starting point there are three key metrics they will look at:

Income Multiples: How many times your income do you want to borrow (usually around 5 times joint/sole is the norm)

Loan to Value: How much deposit are you putting down and what does that leave the bank in terms of their loan against the value of the house

Affordability: When looking at your income and expenditure, what proportion are your financial commitments (including the new mortgage payment) against your overall net income.

Each bank will have its own criteria against the 3 points above. My personal advice would be to talk to your own bank first, they know you best, but we also have some partners at Alexander Carmine Estates who can give you an independent view of your options. Please do reach out to us if we help in this part of your journey.

Finally, its absolutely worth seeing the mortgage manager before you start hunting, as with a mortgage approved you are in a much stronger position when it comes to negotiating the property transaction.



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