Surprising Facts That You Should Know About Mortgages

Getting on a property ladder is no duck soup. From arranging a deposit to ensuring on-time payments, you need to “keep your nose to the grindstone”. A mortgage is the largest debt that ties you for more than 15 years. It is quite hard to project your income for such a long period of time to ensure you will never fall behind on payments.

Missed payments not only affect your credit rating but also put your house at risk. In the first couple of years, mortgages are subject to fixed interest rates. When that period is over, you are put on a standard variable rate. This is the time when you can refinance your mortgage to avail yourself of lower rates. Refinancing of a mortgage is basically common among people who applied for it when they had bad credit ratings.

Surprising facts about mortgages

Here are some facts that you must know while applying for a mortgage:

• Existing debts can affect interest rates

You need a good credit score to get the nod and thereby hang a tale. Your mortgage provider will not make the decision based only on this factor. They will also check how much debt you already owe. If you already owe a loan, your lender will be sceptical about your repaying capacity. Despite good income, they will call your affordability into question.

It is always recommended to be debt-free at the time of applying for a mortgage. It will help you qualify for lower interest rates. Your lender will peruse the financial condition of both applicants if you are applying for a joint mortgage. The chances of getting the nod are much higher when you both are free from all sorts of debts.

• Your assets do not matter

How many assets you own is what your mortgage lender will never be concerned about. You cannot blow them away by owning multiple assets because liquidity matters when it comes to mortgage repayment.

Your lender will lay emphasis on your monthly income. Try to ensure you can repay the mortgage on time. Your lender will check your bank statement from the previous year to determine whether you can bear the mortgage burden along with other expenses. There should be scope for bearing unexpected expenses, too.

Remember that your lender will take into account net income (what you are left with after paying all your expenses, including joint personal loans). If you are applying for a joint mortgage, the income of you both should be high because you both are responsible for partial or full debt settlement.

• Self-employed will face difficulty

You may have to “bend over backwards” to qualify for a mortgage when you are self-employed. Most lenders will not be confident about your repaying capacity because of fluctuations in your business. Jobs are considered less risky than businesses because you have a chance to find another job if laid off.

However, it can be difficult to bounce back if your business does not take off. Mortgage lenders will be sceptical about your repaying capacity and, therefore, charge high interest rates. If you are a start-up, your chances of qualifying for a mortgage are bleak.

• Settlement of the previous mortgage does not count

The settlement of a previous mortgage will undoubtedly help you improve your credit score, but it does not guarantee that you will qualify for your next mortgage. Your lender will certainly check your credit report, and a good credit score will benefit you to some extent.

In addition, they will check your income sources. Because you settled your previous mortgage on time, it does not mean that you can pay off your current mortgage as well. You should always try to ensure that you can repay your mortgage. Your lender might ask you about an alternative repayment plan as well in case financial emergencies pop up.

To increase your chances of qualifying for a mortgage, keep your debt-to-income ratio low. It is always suggested that you do not owe money at the time of applying for a mortgage, including joint loans in the UK.

• Mortgages are very expensive despite good credit rating

The mortgage market is very expensive. The fact is that mortgage lenders make a lot of money from you. Payments are spread across a lot of years, which means you will end up paying a lot of money on your mortgage.

Many buyers think that their good credit rating can help them qualify for better interest rates, but that's not true at all. Lenders take into account various factors to determine the risk involved in loaning you. The higher the risk, the higher the interest rate will be.

One of the interesting facts is that lenders do not pay attention to the score that credit reference agencies calculate. They use their own ways to calculate your affordability and credibility. It is hard to figure out how mortgage lenders assess the risk in your application.

Buyers with good credit reports are likely to get lower interest rates than those with bad credit reports, but sometimes, it has been noticed that people end up with an expensive deal despite stellar credit scores.

• Having no credit history will take you nowhere

A bad credit file is a stigma to your application, but having no credit history at all is appreciated neither. A mortgage lender will assume that you are a very risky borrower as you do not have proof to show that you adhered to payments. A no credit history cannot be an excuse to save yourself from high interest rates. Some lenders will expect you to submit a larger deposit, yet the repayment term will be shorter.

The bottom line

Mortgages are expensive, undoubtedly. It is vital to understand how mortgages work. It will help you understand how much you should borrow and how you can increase your chances of approval. The basics will also let you know how you can save money in interest payments.