Getting a mortgage – three things to do first

I moved house for the second time in two years, just before Christmas. Hopefully it will be for the last time ever, because we’re now in a perfect location and fortunately made enough money on our last place to be able to extend the current one so that it’ll be all the house we’ll ever need. To buy this house I needed to borrow, and this post is the story of how difficult getting a mortgage was, and what I would do differently next time.

To set the scene, we should have been a pretty safe bet for this mortgage:

• Jo and I have no other debt
• We save between 10% and 15% of our monthly net income
• Our income has increased since I applied for my last mortgage.

Computer says no

My last mortgage was for £235,000, but this time we wanted to reduce both the amount (down to £216,750) and the term (down to 20 years from the previous 23). I first approached my existing lender, First Direct, which is also my bank. They see all the comings and going of my bank accounts and could see that I comfortably maintained my previous, higher, mortgage payment each month.

Even knowing the above, they agreed to lend me £116,000, some £100k less than I needed. The only explanation: “Computer says no”. The girl on the phone was mortified, but cheerily informed me that my current mortgage wouldn’t be affected. Which was not very helpful, because they wouldn’t let me port it to the new house.

Committed to saving

Since I applied for my current mortgage just under two years ago, something called the Mortgage Market Review has happened, which has made lenders and brokers more picky about affordability of mortgage lending. They now ask far more questions about regular commitments, to make sure you can sustain the mortgage – this is a good thing.

But my regular monthly savings into Pensions and ISAs are deemed to be a commitment, even though I can stop at any time! So by increasing my net worth each month, I was making my mortgage prospects worse.

Nothing I could say to my bank of twenty years did any good. First Direct wouldn’t lend me what I needed.

Seeking help

Even though I am a financial planner by day, we don’t deal with mortgages, so I turned to our friendly local mortgage broker for help. A good broker will know the different lenders’ criteria and be able to place the mortgage with the best lender. But again, here is another opportunity for the lenders to get obtuse.

As a business owner, I had to produce the last three years’ accounts of the company to show an upward trend in profits – nothing unusual about that. Despite those accounts showing what I was entitled to as a profit share, prospective lenders wanted to see mine and Jo’s SA302, our individual tax calculations, direct from HMRC.

I hadn’t done the last year’s tax return yet, so I had to get that done pretty sharpish, then wait the two weeks till it had all cleared at the Revenue, then order the relevant confirmation.

Fortunately, NatWest, who are now our lender, saw that all was well and offered us the mortgage. We moved on the 18^th December and all ends well.

Getting a mortgage – What I would do differently next time

I realise that I don’t have that much to complain about really. First world problems and all that. But if I, who should be fairly financially sorted given what I do for a living, had so much trouble, how difficult must it be for folks who may have the odd credit card balance, or late payment here and there?

There are three things I would make sure I would get absolutely sorted before I considered applying for a mortgage next time:

1. Run a minimum balance on my current account of a couple of hundred pounds for at least the three months running up to application.

I had one overnight period where I went less than ten pounds overdrawn (well within the free overdraft limit that comes automatically with the account), but which raised questions, despite my having plenty of money in other accounts with the same bank. A bit careless on my part, but just an oversight, not a symptom of wider financial mismanagement.

By keeping a minimum of £200 in my current account without fail, it will show that all is well in control, next time I apply.

2. Have all records immediately to hand

I will have my tax return done (not an issue if you don’t have to complete one), SA302s already in hand, company accounts completed, all before I even begin the application process. That way there will be no unnecessary delays in waiting to get these documents together.

3. Seek advice from the outset

Having assumed First Direct would lend me the money without any difficulty, I was somewhat shocked, having made and had an offer accepted on the place we wanted to buy, that in fact they would not. We could conceivably have lost the house, had our broker not come to the rescue.

Now I’m not ever going to move again, but you might benefit from this point. I highly recommend seeing a good mortgage broker, one with experience, before you begin house hunting. You’ll know how much you can borrow, what it will cost you , and what you need to get ready before you apply.

Minimise delays by being organised from the outset of getting a mortgage. That’s today’s lesson; one which I learned in a more roundabout way than it should have been.