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Mortgage myths

Taking your first steps towards a mortgage and getting a foot on the property ladder can be a really exciting time. But it’s also important that you get the right information before you start your journey.

Male customer in his new dining room

Splitting the fact from fiction isn’t all that easy, particularly with some of the mortgage myths out there. To make sure you’re dealing in truths, read on to hear the reality behind a handful of the incorrect mortgage-related statements we hear most often.

Young people can't get onto the ladder

The truth: Many people in their 20s and 30s think owning their own home is a distant prospect, but this is far from the truth. While our research shows that young people see the deposit as the biggest obstacle to getting on the ladder, it doesn’t need to be such a daunting prospect. Mortgage lenders now offer loans on as much as 95% of a property’s value, meaning you’d only need to raise 5% as your deposit, not to mention the assistance of the government Help to Buy: Equity Loan scheme
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You can't get a 95% mortgage anymore

The truth: Though it is more difficult than it once was to get a mortgage of 95%, there are schemes in place such as Help to Buy: Equity Loan, which aims to help more people become homeowners of new build properties.

While this isn't the traditional 95% mortgage, lenders are still required to find just a 5% deposit, while the government loans you the extra 20%. So, you'll only require a 75% mortgage.

You can only get a mortgage from the company you bank with

The truth: Lots of people believe that their existing bank is the one and only place to go when it’s time to think about a mortgage. That might be because our own banks will have sent lots of emails and letters advertising what they can offer, alongside their preferential rates.

But it does make sound sense to look around a little. Not only might other banks be able to match or better those offers, but there are plenty of non-banking organisations that can provide you with a mortgage.

There’s no point looking into mortgages until you’ve found the home you want to buy

The truth: This is a mistake for two reasons:

Firstly, by meeting with an advisor beforehand, you’ll be able to get a realistic picture of what your can afford to buy, giving you your budget.

Secondly, you can get yourself a mortgage Agreement in Principle (AIP). Though these are time-limited, they act as a ‘provisional’ agreement between you and a lender, and mean things can move much more quickly should you have an offer accepted on a house you love.

Female customer reading in her new living room

You need to have a perfect credit rating to get a mortgage

The truth: It’s certainly true that you’ll struggle to get a mortgage with a bad credit history, but by no means will your credit score need to be perfect.

Getting a mortgage can be difficult if you’ve got a bad credit history, but it’s not impossible. Some mortgage lenders offer bad credit mortgages specifically designed for people in this situation. However, there is a difference between a bad credit history (due to missed loan payments or a CCJ, for example) and no credit history at all, which might be the case if you’ve never taken out credit or a loan. If you have no credit history, take some time to build up your credit score rather than opting for a bad credit mortgage, as these generally come with much higher rates. If you’d like more advice on how to get a good credit score, speak to a financial advisor.

It costs more to pay a mortgage than it does to rent

The truth: In many cases and areas, what you repay on your mortgage each month may be lower than local rental values. It’s also important to consider that with your mortgage repayments, you’re adding to the equity you own in the property each time, whereas you won’t be building any equity as a renter.
New homes at Etling View

The mortgage with the lowest interest rate is the best deal

The truth: It’s certainly right to consider the interest rate, as this can affect how much your mortgage actually ‘costs’. But that’s not to say you should assume that the lowest interest rate means the cheapest mortgage.

The interest rate you’ll pay is just one of several factors influencing the overall cost of a mortgage. You’ll also need to look at:

  • Type of rate: the interest rate on a discount or tracker rate could rise at any time. On the other hand, a fixed-rate mortgage guarantees that your interest rate will stay the same for a set period of time and could be more suitable if you want your mortgage repayments to stay the same each month during that period.
  • Length of the rate period: in most cases a fixed, discount or tracker rate will only last for a set number of years, known as the ‘initial deal period’. Afterwards you’ll be moved onto your lender’s standard variable rate of interest, which is usually much higher – meaning you should remortgage to a different deal at that point.
  • Fees: many mortgages carry fees ranging from £100 to well over £1,000, making a big difference to the overall cost of the rate.
  • Cashback: some rates have higher interest rates but offer cash or free valuation when you take out the mortgage. This can be welcome at a time when you’re spending thousands on the costs of buying a home, but do weigh up whether it’s worth it in the long run.

If you can’t find the right home within your budget, you’ll need to keep saving up your deposit

The truth: For first-time buyers, deciding to use the government’s Help to Buy: Equity Loan scheme could mean you’ll get an equity loan covering 20% (outside of London) and as much as 40% (in London) of the cost on a new-build home, without it costing you a penny more upfront.

Whatever option you choose, it’s vital you’re sure you can keep up with your mortgage repayments, as failing to do so could result in your home being repossessed.

Manford lounge at Church View

Bills, debt and other outgoings won’t affect my application

The truth: This is not true and any monthly outgoings will be considered in your application to assess mortgage affordability. This includes grocery bills, utility bills, debt repayments or car finance.

All of these general expenditures will help the lender to assess your disposable income. Hire purchases or financed purchases will be annualised and the final amount taken off your annual income.

Apart from this, lenders will also conduct a stress test on your finances in case of a change in circumstances - assuring them, and you, that mortgage repayments would always be made.

Friends drinking coffee in their new kitchen

If you can’t save up for a deposit, get a personal loan instead

The truth: Saving up for a deposit is time-consuming and difficult - and for those living in areas where property prices are above the national average, it can also seem endless.

Although borrowing money with a personal loan can seem like a quick fix, it can later result in you being turned down for a mortgage. This is because the lender would undoubtedly have concerns about you being able to pay off the loan that you secured for the deposit, alongside paying off the mortgage each month.

Borrowing money for a house deposit would result in you having an almost 100% loan to value (LTV). This is why borrowing for a deposit is seen as a risk. It could even be a deciding factor in your application being turned down.

However, financial gifts from family are not seen as a risk - as they do not have to be paid back. However you should always be ready to declare and prove where your deposit funds have come from.