What to know about mortgage lenders before you buy a new home
If you plan to buy a new home or remortgage, it is best to familiarise yourself with how mortgage lenders work. Some only offer deals through brokers, while others review borrower’s criteria and then charge for their services.
When it comes to buying a property, chances are you won’t have all the money sitting in a savings account to cover the whole amount so you’ll need to take out a mortgage.
There are dozens of different lenders active in the UK, ranging from the high street banks that you will be familiar with to specialist lenders you may never have heard of.
Can I get a mortgage directly from a lender?
Many lenders will offer their products directly to borrowers, so once you are happy that a product meets your needs you can go ahead and apply directly yourself.
But this isn’t the case with all lenders. Some will have exclusive products that they only offer through mortgage intermediaries known as advisers or brokers. Advisers can help borrowers work out the type of product that matches their circumstances, as well as guide them towards the lenders who are most likely to accept an application from a borrower in their position.
In fact, some lenders only offer their deals through brokers. These lenders may not be household names, but for some borrowers they could be a worthy option.
Should I go direct or use a mortgage broker?
Ultimately, this will come down to your own circumstances. If you are particularly confident about how mortgages work, what you want from your home loan, and have relatively straightforward finances, then there should be no issues with going directly to the lender.
However, brokers can prove invaluable for borrowers who aren’t that confident about mortgages, or who simply want to make use of their expertise in finding the best deal.
This is particularly true for borrowers with more complex finances, perhaps because they are self-employed or have a patchy credit history, as some of the specialist lenders most active in this area of the market only lend through brokers.
» MORE: About mortgage advisers
How much can I borrow?
There are a few different factors which will influence how much a lender may be willing to offer you.
The first is you as a borrower, and your credit history. Lenders will consider your income and typical expenditure to get an idea of what you can realistically afford to repay each month.
And then there is the property itself. Lenders may have different rules about maximum loan sizes for particular types of property, while the value of the specific home you are looking to buy will be important too ‒ many lenders will not offer you more than 90% of the property’s value, meaning you need to put together a deposit of at least 10%.
What do mortgage lenders look at?
A lender only wants to offer you a mortgage if they think you are going to be able to repay it in full, so they will check your finances carefully before approving your application.
That means asking for proof of income, so that they can see what you typically earn and how stable that income is.
You will also have to supply at least three months of bank statements. Lenders want to get an idea of how you manage your finances ‒ do you have money left over at the end of the month, for example, or are you regularly using your overdraft?
Lenders will also check your credit record carefully, as they want to know what sort of borrower you are. Any late or missed payments could be considered a red flag.
They will also look at how you are using the credit already available to you. For example, if you have a couple of credit cards that are almost maxed out then that won’t help your chances, but if you are only using a small amount of the credit available to you, then you may appear more appealing to lenders.
Recent applications for credit will also be on your credit record, and will be something lenders consider in your application. If you have applied for a host of cards or loans within a short period, then that may suggest that you are not in the strongest financial position, which could decrease your chances of getting a mortgage.
Strange as it might sound, lenders will also check the electoral roll. This is part of their identity checks, to ensure that you are who you say you are, rather than a fraudster trying to take out a mortgage in someone else’s name. So, it’s a really good idea to make sure your details on there are up to date.
What do lenders charge?
The most obvious way that a lender makes money from a mortgage is through the interest charged on the mortgage itself. The interest means that the total that you end up repaying will be significantly more than the amount you initially borrow.
For example, if you borrowed £200,000 over a 25-year term and paid 3% interest for the entirety, it would end up costing you £284,527 overall.
In addition, there may be other fees to consider. Lenders usually charge application fees, which you will have to pay to secure a specific mortgage. This could be between £500 and £2,000 depending on the deal and can be paid upfront or added to your mortgage. While some lenders offer products with no application fee, these usually come with a higher interest rate, so may end up costing you more in the long run.
» MORE: Mortgage rates
You will likely also have to pay a valuation fee. This covers the cost of the lender sending a surveyor to inspect the property and to give their opinion on what it is worth. If the valuer thinks it is worth less than the price you are paying, this may have a knock-on effect on the amount you can borrow.
Some lenders will charge an account fee, to cover the administrative costs of setting up and eventually closing your mortgage account. You may also face an early repayment charge if you pay off the mortgage ahead of schedule.
» COMPARE: Mortgage deals
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John Fitzsimons has been writing about finance since 2007. He is the former editor of Mortgage Solutions and loveMONEY and his work has appeared in The Sunday Times, The Mirror, The Sun and Forbes. Read more