10 mortgage pitfalls to avoid

    2 April 2020

    The coronavirus crisis is affecting many aspects of life, including finances, which is why Chancellor Rishi Sunak recently announced that anyone struggling financially would be able to take a break from their mortgage repayments for up to three months.

    But while this can provide a bit of breathing space, it is important to be aware that interest will build up during that time and you will still need to make up the missed repayments. It is therefore worth giving your lender a call to talk through your options and find out how this will work.

    Alternatively, you might be able to move your mortgage to interest-only payments for a while. Or, if you are on your lender’s standard variable rate, it is worth seeing if you can remortgage to a more competitive deal.

    If you are applying for a mortgage, thoroughly researching your options and knowing what to watch out for can help make the process that bit easier. Below are 10 common pitfalls to be aware of…

    1. Lack of deposit

    The minimum deposit required for taking out a mortgage is usually 5%, so if you are buying your first home, the more you can save up, the more likely you are to be offered a competitive mortgage rate. The better your mortgage rate, the lower your monthly repayments will be.

    2. Forgetting about fees

    Mortgage fees can vary significantly. Some mortgages come with no fees attached, others charge up to around £2,500. Often it is the most competitive mortgage rates that have the highest fees, so it is important to do your sums to see whether it works out cheaper to choose a mortgage with a higher interest rate but lower fee.

    3. Having too much debt

    When you apply for a mortgage, lenders will scrutinise your finances to assess your affordability. As well as considering how much you earn, they will look at how much you spend on regular household bills, childcare and socialising, along with how much debt you have. Having debt won’t automatically mean you’ll be turned away, but it can affect how much lenders are prepared to let you borrow. It can therefore be worth paying off as much debt as possible before you apply for a mortgage.

    4. Staying with your usual bank

    When comparing mortgages, it can be easy to stay with the lender you already bank with. But it’s important to widen your search to include banks or building societies you’re perhaps less familiar with in order to get the best deal.

    5. Letting your mortgage offer expire

    If you receive a mortgage offer, take note of when it will expire. An agreement in principle, which lets you know how much a bank will lend to you, is usually only valid for 30 or 90 days. A full mortgage offer, on the other hand, is official confirmation from a lender that it will give you a mortgage, and usually expires after around six months. If the offer expires, you may be able to renew, but it is best to avoid this if you can.

    6. Forgetting to factor in rate changes

    Variable rate or tracker mortgages have typically always been cheaper than fixed rate mortgages. However, if you are considering a variable rate mortgage it is important to remember that interest rates can go up as well as down, so your monthly repayments will follow.

    Although interest rates are unlikely to move upwards any time soon, if you know you can’t afford higher repayments, it is better to go for a fixed rate mortgage, where your monthly repayments will remain the same for a set term. Fixed rate mortgages have become increasingly competitive thanks to low interest rates so the difference between fixed and variable rate mortgages has narrowed considerably.

    7. Ignoring your credit report

    The best mortgage deals will only be offered to those with the top credit scores, so it is a good idea to check your credit rating through one of the three credit reference agencies – Experian, Equifax or TransUnion – before you apply. This means you won’t be in for any unpleasant surprises and, if there are any mistakes on your report, you have a chance to correct them.

    8. Applying soon after becoming self-employed

    Self-employed workers need to provide more evidence of how much they earn compared to those with a full-time job. This is usually two to three years’ worth of accounts, so if you have recently become self-employed it may be better to wait a little longer before applying for a mortgage.

    9. Forgetting to budget for other costs

    As well as mortgage fees, it is also important to budget for other costs such as stamp duty, valuation fees, solicitor’s fees and hiring a removal company. It is also worth checking whether your chosen mortgage has an early repayment charge that would kick in if you repaid your mortgage early.

    10. Making too many applications

    Every time you apply for a mortgage a footprint is left on your credit report which can negatively affect your credit score. If you are rejected for a mortgage, it is best not to immediately apply for another and instead, speak to a mortgage broker who may be able to help you work out which mortgages you are more likely to be accepted for.

    Note that if you apply for an agreement in principle, the lender will run a credit check, but it is worth asking if this will be a ‘hard’ or ‘soft’ search. A hard search will leave a mark on your credit report, so other lenders will see it, but a soft search won’t.