Illustration by Alex Pasquarella

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So you've just come from our previous blog about renting vs buying, and have decided to learn more about the buying route. This blog post tells you all about mortgages, and what you can keep in mind while applying for one!

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What is a mortgage?

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It’s a loan to help you with buying a house that you typically repay over 20-30 years. They are usually provided to you by building societies or banks. The average house in the UK (£280k) is 7.1 times the average salary (£39k). Taking this into account, most people who want to purchase a property in their lifetime are likely to require a mortgage (unless you somehow manage to stumble upon £250k+ in cash).

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How it works is: you pay a deposit, usually a percentage of the total amount. This can range between 5% - 20%, and the deposit amount depends on things like whether this is your first property or the amount you’re borrowing. Then you have to pay the rest of the amount in monthly instalments, with interest on each payment. The interest you pay depends on the type of mortgage interest rate your lender requires, usually between fixed and variable interest rates. 

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A mortgage is taken out against the property. This means that if you fail to make interest payments towards the loan, the bank has the right to claim your property.

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What can affect your mortgage eligibility?

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Credit Score

This is the most common reason people are denied mortgages by lenders. Your credit score shows your ability to repay loans, and with a mortgage being such a big loan the lender looks to your credit history to see if you are a reliable borrower. Making too many credit applications can also lower your chances to get a mortgage. You can use various online credit checking services to see how your credit score stands.

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Debt

If you are in loads of debt this is also likely to affect your ability to be approved for a mortgage. This shows the lender that you have more than one loan to be repaying at the same time, meaning that your likelihood to default on the mortgage payments to cover the other payments is high. Also, you probably don’t want to take on more debt. 

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Registering to vote:

This is a simple way to make things easier. Registering to vote can confirm that you live at your address and help verify your identity. It is easy to register and you can even boost your credit score this way. 

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The amount you earn:

The amount you earn determines the amount your lending institution will be willing to loan to you. Lenders generally provide between 4 and 4.5 times your yearly income. If you are applying for a sum that would have repayments exceeding the amount you earn each month, this would reduce your eligibility to loan that amount. There are mortgage calculators available online that could help you determine a reasonable amount, as well as mortgage advisors who can help you with the application process.

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The deposit you can pay:

The deposit on a property ranges between 5%-20% of it’s total value. If you are unable to pay the deposit your lender requires this could reduce your chances of getting approved. Your best bet is to save up as much as you can for a deposit so that you have higher chances of getting approved. There are different schemes available to help you save for your mortgage deposit, such as a Lifetime ISA.

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Self employment:

The lender will look at your source of income while checking your eligibility. If you are self employed, this does not mean you cannot be eligible for a mortgage. It does, however, mean that you make sure your business accounts are profitable beforehand. You will have to provide your income statements for the past 1-3 years, depending on your lender. 

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The time you have lived in the UK

Finally, there are restrictions on your mortgage eligibility if you are not from the UK. You need to be able to present a valid work visa and employment contract if you have lived in the UK for less than 3 years to be approved for a mortgage.

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