Mortgage Repayment Methods
2 August 2021
Step 1: Deposit – First things first
Whether you are a First Time Buyer, a Home Mover, or a Landlord, you must have a deposit when purchasing a property with a mortgage. The greater the deposit amount the better mortgage deal you will be able to obtain from the lender. Deposit is the money you put down as a proof of your interest in the property and your commitment to the loan agreement.
Bear in mind that the deposit is always calculated as a percentage of the value of the property you would be purchasing, and it is being referred to as Loan-to-Value (LTV).
To give you an example of how it works, let us say you want to purchase a property for £200,000.
- The 90% LTV would mean that you have a 10% deposit, i.e., £20,000.
- The 80% LTV would mean that you have a 20% deposit, i.e., £40,000.
- The 75% LTV would mean that you have a 25% deposit, i.e., £50,000.
When you subtract the deposit amount from the £200,000 purchase price, the remaining amount
- the £180,000, or
- the £160,000, or
- the £150,000
would become your mortgage loan if successful on the mortgage application.
Step 2: Credit score – Why is the credit score so important? And how credible are you to the lenders?
When looking into lending money, lenders usually look at one’s credit score.
Credit score is a snapshot of how you have been managing the money and the credit you already have over the period of last six years. If you missed a payment or defaulted on it, it will be reflected in your credit report and thus the credit score.
Being overly cautious with credit commitments and not having any credit cards or personal loans is not best news for the lender either. How will they know if you can handle a mortgage loan if so far you have shown no history of handling any financial commitments?
You can check your credit score only with various credit agencies (bureaus), i.e.: Experian or Equifax, and not with the banks. Various lenders have various lending criteria and various minimums on credit scores that they accept when considering a mortgage loan.
It is a prudent idea to check your credit score before you apply for a mortgage. If there is anything not updated in your file and your credit score still reflects a missed payment or a not-settled default, you will give yourself the needed time to correct the file and to remedy your overall situation with the lenders.
ou do not need to send your credit score to the lender. They will access this information themselves when considering your mortgage application. But here at NEST your mortgage advisor may very well request that you do check your credit score as it will be a strong indicator which lender might be most appropriate to go to with your mortgage application.
CheckMyFile is a website which NEST is using the most when it comes to checking our clients’ credit score. It shows all the relevant credit scoring agencies in one report. And since various lenders use various credit scoring agencies, CheckMyFile seems to be a good choice to have an all-rounded overview of our clients’ financial situation.
Step 3: Documents - What the lender may ask of you?
It is not enough to just show up in a lender’s office or at a brokerage firm and expect to be granted a mortgage loan. As with everything else in life, when it comes to finances, lenders must obtain sufficient evidence of your income to see if you could afford the mortgage.
1. Proof of Identity and Proof of Address
To reduce fraud, lenders are obligated by law to check identity and address of every person who applies for a mortgage or any other form of a loan. A combination of well scanned documents, such as passport within the expiry date, UK driving licence with current address and within the expiry date, current council tax bill or other major utility bills dated within last three months are going to take care of this requirement.
2. Proof of Income
Required to establish your affordability. It answers the question if you can afford to borrow and how much.
- If you are in an employed role - collect your payslips (last 3-6 months) showing your basic earnings, overtime, shift allowance, commission, any bonuses, and any other performance-related income. And have a copy of your recent P60 form available to send to the lender. Not all lenders may ask for P60, but in some cases they may ask for it to verify your overall annual income. If there is any other income that you can prove you receive on regular bases, i.e., benefits, pensions, awarded maintenance – the lender may ask for copies of award letter(s) also.
- If you are self-employed - you will be asked for Self-Assessment forms (SA302, also known as Tax Calculations), and Tax Year Overviews (TYOs) from the past two to three years, depending on your circumstances. If you are VAT registered because your overall turnover exceeds £85,000 per year, lenders may ask for full accounts for the past three years and they may also request information on the accountant who has prepared the accounts. Really, it all depends on the lender and their lending policy they have in place.
- If you are an LTD company director - if you hold a minimum of 20%-stake in a company, lenders may treat you as self-employed and request the same set of documents as already mentioned above. Make sure, however, that you have a proof of any paid salary, dividends, or can document your share of retained profits in the company as visible in the director’s loan account. If you are in credit with your company, i.e., your company owns you the money, as stated in the director’s loan account, the lenders will see that you are in good position and are able to inject capital into the business to help it grow. If you are in debit on the other hand, the lenders will see that you only borrow the money from the company. And company’s financial position is a key factor in the director’s ability to service the mortgage.
3. Bank statements
For the minimum of the last 3 months of activity, proving your level and consistency of income and expenditure management.
- Your mortgage broker may ask you for statements of all of your accounts that cross-transact with your main account, i.e.,
– your savings account,
– Help-2-Buy ISA account,
– NS&I account, or
– any foreign account that was used to send the money for the deposit into the UK
(Note: statements may be requested to be translated into English). - It is becoming more and more popular to send money into various online crypto currencies investments accounts. These might need to be looked at by your advisor also who needs to demonstrate to the lender that activity on this type of account is legitimate and deemed as satisfactory.
4. Proof of Deposit
Whether your deposit is coming from savings or gifts, lender is required by law to check its source.
- You will be asked for bank statements showing any incoming lump-sums of money, be it from a sale of oversees property, cashing in of any investment(s), or receiving an inheritance. These are only a few of such examples.
- Giftors’ identity will have to be verified also. You will be asked to provide copies of their passports and a proof of their address (i.e., copies of any major utility bills), latest three months’ worth of bank statements, including their bank statements showing the transfer of gifted money from their account into yours. They will also need to fill out and sign a Gifted Deposit Letter which will help to assess and process your mortgage application.
- Copy of a written Will and/or Grant of Probate might be required also.
- If your deposit comes from a sale of property, you will be asked for the Property Sale Contract or a Confirmation Letter from the solicitor who dealt with the sale.
Please, note: If the property was sold overseas and the documentation was written up in a foreign language, the sale contract will have to be translated by a sworn translator and the copy of the original sales contract along with that translation will have to be presented to the broker as well.
5. Proof of Residency
I.e.: biometric card, copy of the passport with stamped in visa, or recently introduced settlement status confirmation.
Step 4: An Agreement in Principle (AIP) – to make your property hunt more efficient.
Once your affordability is assessed, the lender will give you an Agreement in Principle (AIP), also known as a Decision in Principle (DIP). The AIP/DIP shows how much you can borrow and with which lender. Having this document in hand, you have just become a credible buyer in the eyes of both the estate agents and the property sellers (vendors). The AIP/DIP simply proves your purchasing power and your readiness to proceed with the purchase as your initial lending assessment has already been performed by the lender. In other words, you are not a “time-waster.”
Step 5: You found the property – Your offer on the property got accepted.
Once you find the property and the offer you make on it is accepted by the vendor, your mortgage broker will start the full mortgage application process. The property valuation process (done by the lender to make sure that the value of the property is a sufficient security for the mortgage loan) is triggered and a conveyancing process begins.
Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it. Some forms of Buy to Let mortgages are not regulated by the Financial Conduct Authority
