Many people dream of owning their own home but think they won’t be able to get a mortgage to fund it due to common misconceptions. But the amount of mortgage misconceptions, contradictory rules and mind-boggling jargon out there can make it hard to understand how mortgages even work, let alone get one.
Grosvenor Wealth Management’s Mortgage Adviser, Alan Ramsden, debunks these mortgage myths which may be costing you your dream home and shares his insights to help get you on the first step of the property ladder.
You can’t get a mortgage if you’ve just changed jobs
Many people think they need to have been with their current employer for at least six months in order to get a mortgage. Whilst this may be the case for some lenders, the majority of lenders don’t expect this, as long as you can provide evidence that you’ve been in employment for the last 12 months. The main thing is that you can provide payslips to prove you’ve had a permanent source of income for the past year and that there has been a natural progression from one job to another. There are Lenders who are happy to provide a mortgage if you have a signed Employment Contract and will start Employment within 3 months.
Self-employed people will suffer from higher interest rates
There’s a common misconception that those who are self-employed will have to pay a higher interest rate on their mortgage, which may be deterring such people from looking into their mortgage options. However, this is usually not the case. As long as they can provide two years of accounts, there are lenders who are willing to provide the same rate to the self-employed as those who have an employer. In cases where there are only one year of Accounts, there are some Lenders who will consider providing a mortgage.
The interest rate lasts for the whole term of the mortgage
In some countries, you have to pay the same interest rate you initially agreed to for the length of your mortgage term. However, in the UK it’s more common to change your mortgage rate throughout the term. You may be able to change the product you’re on, as well as the lender you’re borrowing from, which may lead to a reduction in your interest rate.
The rate you pay is based on your credit score
Whilst your credit score is an important factor when applying for a mortgage, different lenders will use your credit score in different ways. Not all lenders will base the rate on your credit score and many deem the loan-to-value (LTV) and affordability to be more important when determining the rate. However, keep in mind that your credit score is still an important factor in your mortgage application, therefore it’s still beneficial to try and improve it in advance of your application.
You need to have a large deposit
It’s a common belief that you need to save tens of thousands of pounds in order to fund a deposit for a mortgage. Whilst it’s advised to save as much as possible for a deposit, it’s very common for people to get a mortgage with just a 5% deposit with a respectable interest rate. Also keep in mind that there are many government schemes available which help to build your deposit, such as Help to Buy.
Your mortgage gets written off if you pass away
Many people are shocked to hear that even if they die, their mortgage debt isn’t wiped off. In this situation, the mortgage debt would need to be paid back to the lender before any money from the estate could be claimed by whoever is written into your will. If the mortgage couldn’t be repaid, then the house would have to be sold. It’s therefore important to think about protecting yourself and your mortgage in case the worse was to happen, so that your next of kin would be able to retain your property.
You don’t need to think about mortgages until you’ve found your dream property
Sure, you won’t need to actually apply for a mortgage until you’ve had an offer on a property accepted. But you certainly need to have scoped out mortgages before then, to check what you can afford. Different lenders will offer different amounts, but a good way of getting an accurate idea of your budget is to apply for a mortgage ‘agreement in principle’ (AIP). This is a statement from a lender that they would, in principle, lend you a certain amount of money.
You can only get a mortgage from your current bank
Your bank might bombard you with adverts for its mortgage range and even offer preferential rates to you as an existing customer. However, with more than 80 mortgage lenders in the market, it’s worth shopping around before deciding who to apply with. There are thousands of mortgages available, meaning that finding the right deal can be overwhelming.
Lowest interest rate = cheapest mortgage
The interest rate you’ll pay is just one of several factors influencing the overall cost of a mortgage. You’ll also need to look at:
Type of deal: the interest rate on a discount or tracker deal could rise at any time. On the other hand, a fixed-rate mortgage guarantees that your interest rate will stay the same for a set period of time, and could be more suitable if you want your mortgage repayments to stay the same each month during that period.
Length of deal period: in most cases a fixed, discount or tracker deal will only last for a set number of years, known as the ‘initial deal period’. Afterwards you’ll be moved onto your lender’s standard variable rate of interest, which is usually much higher – meaning you should remortgage or renegotiate to a different deal at that point.
Fees: many mortgages carry fees ranging from £100 to well over £1,000, making a big difference to the overall cost of the deal.
Cashback: some deals have higher interest rates but offer cash when you take out the mortgage. This can be welcome at a time when you’re spending thousands on the costs of buying a home but do weigh up whether it’s worth it in the long run.
Fee free remortgaging. Many remortgage deals come with free survey and Solicitor.
Young people can’t get on the property ladder
Getting onto the property ladder can seem impossible, especially now. But there are more options than people realise that can make it possible.
Saving a deposit big enough is one of the biggest barriers for young people who want to get on the property ladder. But it’s possible to get a mortgage even if you can’t save a lot of money. There are schemes like the Help to Buy and shared ownership. There’s also the option of getting a guarantor mortgage where a parent or close friend or family member can agree to pay your mortgage if you can’t.
Guarantor mortgages generally do not work now. Because of the Mortgage Market Review (MMR) which states, ‘all parties to the mortgage must be able to pay the mortgage for the term of the mortgage’. This effectively finished off the Guarantor mortgage as parents generally cannot commit to pay a mortgage for 25 – 40 years.