HOW TO... Get a Mortgage

How will you get a mortgage? Do you need to get a mortgage? A mortgage is one of life's necessary evils - and that's if you are lucky enough to be able to get one. But most people are, according to the Department for Communities and Local Government (DCLG). Statistics from the DCLG reveal that around 70% of the UKs 26.2 million dwellings are owner-occupied and that 40% of these dwellings are funded by a mortgage.

How do I set out to get a mortgage?

The most important thing you will need is an income. This can either be from a straightforward PAYE job, where you earn a set monthly salary, or from self-employment - although the latter will usually require three years worth of certified accounts if you apply for a standard mortgage.

Sure about your mortgage choices? If you're not and you need someone to talk to, why not call us for independent, unbiased mortgage advice.

What about a deposit?

It's handy if you can manage to scrape together a deposit, and preferably one that equates to at least around 5% of the value of the property you are hoping to buy. However, the Halifax House Price Index puts the price of an average property at just under £200,000 (August, 2007), which means saving £10,000 in addition to home-buying costs such as Stamp Duty and legal fees! It is possible to forfeit the deposit altogether and get a mortgage for 100% of the property value. Do bear in mind what that could mean for your wallet.

If you can manage to save a deposit, this sum will be subtracted from what you need to borrow to buy the house. For example, if the property costs £167,000 and you have raised a £4,000 deposit, you will need to get a mortgage of £163,000. As well as starting home-owning life with a smaller loan, a deposit will open the gates to a wider range of mortgage deals and lower interest rates. In short, the benefits of a deposit should not be underestimated.

How big a mortgage can I borrow?

So long as you are a UK national and over 18 years old, you are then free to apply for a mortgage - but of course, there will be a maximum amount that you can borrow. The traditional means of calculating this was by way of income multiples, which do what they say on the tin. For example, your gross annual income is multiplied - typically by 3.5. So if you earned £25,000, you would qualify for a £87,500 loan. Compare this sum to the price of an average house, and the problem of first-time buyer affordability becomes clear. Some lenders may let you borrow four times salary and even more - but usually in return for other considerations such as your future earnings prospects working in a professional occupation.

Do you know how much you could afford to pay each month? Find out how big a mortgage you could get.

If you are buying with someone else your borrowing capacity will be significantly boosted. A typical lending multiple might be three times joint income, so if you earning £25,000 each, you could qualify for a loan of £150,000.

However, an increasing number of lenders are moving onto 'affordability criteria', which is arguably a more sensible calculation. This is when a lender focuses on your net monthly income, rather than your annual salary. From this sum, it will deduct all your existing commitments, such as personal loans, credit card payments or a hire purchase agreement on your car. Most lenders however, will be sympathetic when it comes to Student Loans.

The lender will then work out how much your mortgage will cost each month - over a 25, or even 30 year term and a given interest rate - and assess if you can realistically afford to fund the repayments.

Which lending criteria will be best for you, in terms of reaching your maximum borrowing capacity, will therefore depend on your circumstances.

So if all this adds up, how can you be refused a mortgage? The most common reason for being refused a mortgage you can theoretically afford is your credit rating. This is a kind of 'financial CV' with your name on it, held by credit reference agencies.

Is your credit record correct? Check your credit reference, credit file, credit score with CreditExpert from Experian.

Your credit file will list all previous borrowing and details of late or missed payments, as well as any County Court Judgments (issued for long-term non-payment), held against you. Your credit file will also record how long you have lived at your current address and if you are on the electoral role.

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Laura Howard
23 September 2007 © Moneyextra.com

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