Monday mythbusting: 5 myths about mortgages you’re better to ignore
Getting a mortgage is one of the biggest steps you can take in both your personal and financial life. Deciding you’re ready to get on the property ladder is a huge deal – which is why so many people have an opinion on whether you should do it, and the best way to go about it.
In the latest of our mythbuster blogs, we examine some of the most common myths around mortgages, and why you shouldn’t pay attention to them.
Your credit needs to be perfect in order to be accepted for a mortgage
This myth is probably more common among first time buyers who don’t have much experience of how the mortgage market works, and it can put a lot of people off thinking seriously about buying their first home.
When it comes to mortgages and your credit score, it’s important to make the distinction between ‘perfect’ and ‘good enough’. Mortgage lenders will always look at your credit score as a way of assessing your ‘creditworthiness’ – in other words, how likely you are to be able to repay what they allow you to borrow.
That said, lenders don’t expect you to have perfect credit. The truth is that most people don’t – if everyone needed a spotless credit history to buy a home, there would be a lot more people renting.
The important thing is to make sure you’re aware of what your credit score is, and what options your rating leaves open to you. According to Experian, a fair mortgage score of 721-880 is enough to get good mortgage deals with reasonable interest rates, and even a poor score of 561-720 is enough to get you a mortgage, although your interest rates are likely to be higher.
You’ll need a deposit of at least 15%
Deposits are one of the most misunderstood aspects of getting a mortgage. The way a mortgage works, you can lay down a deposit as a way of paying for a chunk of the property upfront.
The higher your deposit, the less you need to pay towards your property overall, meaning you’ll pay lower monthly mortgage payments. By that logic, the more you can afford to put down upfront the better, but there’s no reason why you can’t get a mortgage with a lower deposit.
In fact, the UK Government has recently launched a new 95% mortgage scheme that allows first-time buyers to get a mortgage with a 5% deposit.
The scheme launched in April and was set up in order to address the problem that for too many people in the UK, no matter how hard they work, saving up enough money for a large deposit can be virtually impossible.
Your deposit is the only upfront cost you’ll face
This myth needs busted because the alternative is people getting quite a shock when they realise the total cost involved in purchasing a property. Your deposit will undoubtedly be the largest upfront cost when you buy a home, but it’s definitely not the only one.
First, there are legal fees. You can’t buy a home without hiring a lawyer, and hiring a lawyer costs money. While how much depends on which lawyer you use, and how many billable hours they work on tasks related to your mortgage, legal fees can be anywhere between £850 and £1,500 including VAT.
Next, there are fees for the mortgage itself. You’ll pay a booking fee for ‘booking’ the loan when your mortgage application goes through (somewhere around £100) and you’ll also pay a mortgage ‘arrangement’ fee – this covers the cost of the mortgage lender setting up the mortgage for you, and can be as much as £2,000 upfront.
Finally, you’ll face upfront costs if you pay over the home report for a property. The home report is an independent valuation of the property, and acts as a guide for the kind of offer you’ll need to make in order to have a bid accepted by the seller.
Anything you offer over the value of the home report comes straight from your pocket. Let’s say you’re looking at a flat with a home report of £90,000, and you put in an offer of £95,000 which is then accepted. In that situation, you’ll have to pay the extra £5,000 upfront, as well as a deposit of at least 5% (£4,750), taking your upfront cost to a minimum of £9,750.
A mortgage will tie you down for good
When you tell people you are considering taking the plunge and applying for a mortgage, this is likely one of the first things you hear – the idea that a mortgage is some sort of millstone around your neck and you’ll be tied to one place forever.
It’s not true at all. That’s not to say taking out a mortgage isn’t a life-changing decision. Becoming a property owner will clearly change your situation, in that you’ll be responsible for making your mortgage payment every month and maintaining a property.
That doesn’t mean you’re destined to live in that home forever. As long as you don’t make any of the big mistakes people make when buying a property – like massively overpaying, or purchasing a property in a really unpopular area – there’s no reason why you can’t simply sell up and move on whenever your circumstances change, often with a tidy profit.
You can’t be in debt and be accepted for a mortgage
It’s not right to assume that you can’t be in debt when buying a home. When you think of the amount of people who carry some of the most common forms of debt, from car finance loans to student loans, there is clearly a way to pay off debt and also be accepted for a mortgage.
Carrying debt isn’t the problem. What really matters is the amount of debt you carry relative to your total income. Mortgage companies will pay close attention to your debt-to-income ratio. If the amount of debt you carry represents too high a percentage of your total income, that puts you at risk of defaulting on your mortgage payments.
In that scenario, you’re more likely to be rejected for a mortgage. Even if you are accepted for a mortgage, you will likely be facing high interest rates and will be asked to put down a bigger deposit upfront to offer the lender more security against what you borrow.
If you find yourself in this situation, it’s time for you to seek debt advice. As one of the UK’s biggest providers of debt solutions like IVAs, Creditfix can help you repay your debt at an affordable rate, support you in rebuilding your credit score, and help you find a mortgage that works for you.