We've teamed up with Kala Sreedharan from online broker Habito to help get you on the road to a mortgage the pain-free way. Let her insider knowledge guide you through the most common pitfalls.
As a first-time buyer, you're constantly being told that buying a house and getting a mortgage is the biggest financial commitment you'll ever make. And it's probably true, but it doesn't half put a lot of pressure on the whole thing. Then you couple that with just how confusing mortgages can seem and you've really got a lot to contend with.
But it doesn't have to be an uphill battle. That's why we've teamed up with an expert. Meet Kala VP of Operations at online mortgage broker Habito.
She started off in the industry as a Trainee Mortgage Adviser and now she heads up Habito's whole team of mortgage experts. Her front-line experience means she really does have that insider knowledge to help guide you through the trickiest bits of the mortgage process.
Kala has shared her insider knowledge especially with ClearScore to help you spot and overcome the four most common obstacles and mistakes people make when getting a mortgage.
It's over to you Kala...
The industry doesn't make it easy for you, but not understanding the mortgage basics is a sure-fire way to a bad deal
It shouldn't really be this way, but unfortunately, there is a lot to get to grips with when it comes to getting a mortgage.
You've got to juggle all the finances with actually finding the home that makes it all worth it. And to top it off, you've got a seemingly never-ending list of people you need to involve before you can get a mortgage. You've got brokers, lenders, surveyors, and solicitors to think about. That's a lot of moving parts and a lot of things going on all at once.
Because of this, we know how tempting it can be to switch off a bit and just sort of do whatever the bank or lender tells you to do. But ultimately you're the one that has to live with the mortgage, so it's important you really understand your options and what you're signing up for. That way you can be sure you're getting the deal that works best both for your finances and your life.
At Habito, we're always trying to cut through the jargon to simplify everything as much as possible.
These are my top tips to help boost your understanding of the basics:
Read up on it first
There's loads of handy guides out there that can help you get to grips with the basics. This will help make sure that when a lender or broker is discussing things like the LTV, the fees or the repayment term you have a better understanding of what it all means for you.
Ask lots of questions
Remember no question is too small or too silly when it comes to mortgages. It's much better to ask hundreds of questions than to sign a deal you're not entirely sure about. If you're chatting with a lender or a broker I'd say these are some of the best questions to ask:
- What's the initial interest rate and what will the rate be when the fixed term is up?
- Are there any fees for arranging this mortgage, for overpaying or for remortgaging? This will help you work out the true cost, and also help you plan ahead if you choose to remortgage or pay it off early in the future.
- Are there any other conditions attached to this mortgage deal? Sometimes mortgage deals come with attractive rates but only if you also take out their compulsory insurance. Always check for things like this and factor it into your calculations.
Focusing on the rate rather than understanding the true cost could leave you out of pocket
It's only natural to want to minimise the interest you'll be paying on your mortgage, so we're not surprised how often people trip up on this. But making this mistake can leave you out of pocket.
If you're shopping around and comparing different mortgage options, it's worth bearing in mind that best buy tables often don’t include the different kind of fees you’ll have to pay.
And you might be shocked to hear that these fees can actually make as much difference as the interest you’ll pay.
For example, let's say you're looking for a £130k mortgage with a 2 year fixed term. One option is a zero fee product that charges an interest rate of 1.79%. The other option has a much lower rate of 1.35% but the setup fees come to over £1,000. Which option is better? In this situation, opting for the first one would actually save you money over the 2 year period, despite the higher interest rate.
Luckily, if you opt to use a broker you don't have to worry about this too much. Regulation requires brokers to explain all this when they're advising you. So chatting to a pro is probably the best way to avoid making this mistake yourself.
But if you are going solo, always make sure you add the fees to get a figure for the total cost. Once you have this figure you can use it to work out how much you'll really be paying over a certain period - the length of the deal or the life of the mortgage.
I've seen lots of people get tripped up by not having a clear understanding of their repayment term
In my experience, people tend to look straight at the option with the lowest repayment term. A lower repayment term means you pay it off more quickly, and so you pay less interest overall.
But if you want to keep the term as short as possible, you also have to commit to making higher monthly payments.
Now here's the trick. Most mortgages allow a very generous overpayment allowance (usually around 10%). This means that each month you can pay 10% above your monthly repayment amount without incurring any fees.
In lots of situations this actually has the same effect as shortening your term, and so helps to cut down the total amount of interest you pay. But crucially, this option gives you more flexibility. If your circumstances change, you can just stop overpaying.
So if the mortgage deal allows you to overpay, you might be better off opting for a longer mortgage term, and then make overpayments. This gives you much more flexibility than locking yourself in to high monthly payments from the off.
Finally, a big mistake is simply not knowing what's in your credit report
Lending criteria have tightened considerably over the past decade which has made it a lot harder to get approved for a mortgage.
This means that affordability and credit checks play a really crucial part in a lender’s assessment of whether to give you a mortgage or not.
It's important to make sure you're on top of this before you head into your mortgage affordability assessment. One recent late payment or default could mean the difference between paying an extra £100 a month on your mortgage or worse, not being able to get one at all.
The best advice I can give is to get into the habit of periodically checking your credit report well before you're actually in a position to get a mortgage. If you know where you stand in advance you'll have time to work on your score. If you only check the day before, you may have a nasty surprise which is definitely not what we want.