the simple guide to: mortgages
Owning your own home is something a lot of people dream of as they become adults. However, what do certain terms mean, and what do I need to get a mortgage? Sam Draper, founder of The Small Business Accountant, has created a guide to give you the mortgage basics.
how much will I need as a deposit?
Generally, the amount a lender will provide is given as a percentage. That means if the cost of the property was £100,000, and the lender would provide 90% you would need to have the remaining £10,000. Depending on economic factors some lenders may require a 20% deposit so this is worth checking when seeking a mortgage. You would then need to allow for any stamp duty tax and any other fees involved in buying a property such as purchaser legal fees.
Top tip: you only need to prove you have the deposit amount at the time of making an offer. You can save for the extra bits in-between making the offer and the day you exchange (can be 3 months or more)!
what does ‘exchange’ mean?
Exchange is an abbreviation of ‘exchange of contracts.’ This is the point at which the contract for the sale of the property has been drawn up by the lawyers, and that contract has been signed by the buyer and the seller. The deposit funds are transferred from the buyer to their solicitor immediately prior to the exchange. Once the contract has been signed, the transaction becomes legally binding, and if either side changes their mind, they will lose their deposit!
what does ‘completion’ mean?
This is the point at which the purchase/sale has been completed. The deposit amount will have been held by the buyer’s solicitor until now, but now the lender’s funds will have also reached the buyer’s solicitor, and both amounts are transferred to the seller’s solicitor to ‘complete’ the purchase/sale, and the keys are given by the seller to the estate agent for collection by the buyer.
which documents will I need?
· Proof of address: (usually from the last 3 months). Utility or Council Tax bills or bank statements provide the best examples
· Personal ID: Passport or driving license
· Payslips (can be up to the last 3 months)
· Bank Statements (up to the last 3 months usually)
tips towards obtaining a mortgage in the future.
Get yourself added to the electoral role. This is something credit agencies will check when undertaking your credit check. You can be rejected if you are not on the electoral role. It is another way of the credit agency checking you are who you say you are, and you live where you say you do!
Own and use a credit card. This helps your credit rating AS LONG AS YOU PAY IT OFF EACH MONTH! It will show that you can pay your debts. However, do not let your balance reach its credit limit, and do not pay the minimum amount each month. Both suggest you struggle to make ends meet.
Avoid pay day loans. This suggests that you spend everything you earn, meaning you have no flexibility if interest rates change, or if you were to lose your job. Banks are cautious, and it will look like you would not be able to pay the following month’s mortgage payment, if the unexpected happened.
Start building a deposit as early as you can. In order to obtain a mortgage offer, lenders (e.g. banks) will need to see proof that you hold the minimum deposit.
Obtain a Mortgage in Principle agreement. This is a simple document from a lender stating the amount they would be prepared to lend you. This means you can make an offer for a property, and crucially, look credible.
When you’re ready to look at properties, you only need to have the deposit amount in the bank. You can save the amounts for stamp duty and legal fees between placing an offer, and completing and moving in.
Final top tip: if you are a first-time buyer, not in a chain with deposit and mortgage approval ready to go, you are an appealing buyer for the seller as there won’t be any complications down the line. Don’t be afraid to emphasise this when making an offer.
Founder of The Small Business Accountant