Preparing to get a mortgage is already a challenging task, but ongoing economic uncertainty makes navigating this milestone even trickier. While mortgage rates are reducing and product choice is increasing, interest rates continue to rise.
According to Moneyfacts, the overall two and five-year fixed mortgage rates fell for a third consecutive month in February, which is good news for mortgage seekers. In addition, the average asking price for a UK home saw the lowest increase for the month from January to February since Rightmove records began in 2001.
Despite this, the Bank of England Base Rate remains at its highest in 14 years and the cost of living crisis is putting extra pressure on the ability to save and budget effectively. A mortgage is a long-term agreement, so it’s important to be clear on what you can afford and complete the necessary preparation to increase chances of a good deal.
Stacey Lowman, head of employee wellbeing and financial coach at Claro Wellbeing, shares five tips to prepare for a mortgage amid ongoing uncertainty.
Set your budget
The first step to take when preparing to get a mortgage is working out how much you need to borrow. This will depend on the deposit amount you have available, the average house prices in the area you’re looking to buy and how much you can afford to pay each month.
It’s important to set a budget to ensure you don’t end up borrowing more than you can afford. It’s also wise to keep track of the housing market, as prices rise and fall, timing your purchase can make a significant difference to how much you pay for a property.
Make sure to factor in the other expenses you’ll have on top of mortgage payments. In the current cost of living crisis, the cost of essentials and bills are increasing and it’s vital to make allowances for higher costs when deciding what’s affordable. In addition, you should maintain a rainy day fund and some savings, so take this into consideration too.
Take control of your spending
When applying for a mortgage, a lender will usually ask for at least three months of bank statements in order to see how you spend your money and identify repeat outgoings such as a gym membership or subscriptions. It’s wise to prepare for this by demonstrating sensible spending and consistent saving in the period leading up to the application.
In addition, the more you manage to save, the larger your deposit will be. This means that you’ll have a greater choice of mortgage products and have to borrow less money to purchase your property. Ahead of considering a mortgage, review your budget and cut back on any unnecessary luxuries.
If getting a mortgage is a more distant prospect, consider putting a plan in place for how you intend to reach your financial goal of saving a deposit. Within this, you can outline how much you’ll need to save each month or year to make it happen. A financial coach can help you to develop a plan, too.
Ensure job stability
Lenders like to see that you’re in a stable job role as income is key to working out how much you can afford to borrow. Avoid moving jobs at least three months before applying for a mortgage and ensuring that you’ve passed any probationary period to secure a permanent position.
If a pay rise or promotion is on the cards, consider waiting for this to happen before applying, as a higher income increases the potential for a bigger mortgage. Some employers also offer access to financial guidance, in the form of savings tools, financial coaching or access to resources that can help you to navigate the process of getting a mortgage.
Consider credit
Before applying for a mortgage, make sure to check your credit score. This is an opportunity to iron out any inaccuracies and can be improved by actions such as reducing debts, paying bills on time every month and registering on the electoral roll.
Lenders will use your credit report to gauge how reliable you have been at repaying debts in the past and this can impact the mortgage deals available to you. Be mindful of using Buy Now, Pay Later schemes as, depending on the lender, any late payments can show up on your credit report.
Shop around and think long-term
When it comes to deciding on a mortgage product, make sure you consider all your options and think long-term. For example, a fixed-rate mortgage means your monthly payments will stay the same, regardless of interest rates, so this could be a good option if you want certainty around your monthly payments in uncertain times.
However, if interest rates do fall, you may end up paying more than the market rate further down the line. You also need to consider how long to fix it for, as trying to leave a fixed-rate agreement early can be costly. Variable rate mortgages move up and down, reflecting the UK economy.
This means that if interest rates drop, so will the mortgage rate and therefore your monthly payments, but if they continue to rise, your monthly payments could increase. In the current economic environment, this brings uncertainty, but is often reflected in the cost difference between fixed and variable rate mortgages.
You could speak to a mortgage adviser who will be able to guide you through the available products and help identify which is right for your individual circumstances.
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