How hard is it to get a mortgage?

In this brief guide, we are going to answer the question “How hard is it to get a mortgage”.

Getting a mortgage has certainly become a much harder thing to do since the economic crisis of 2008.

Regulatory bodies around the world and especially in the UK put in new measures to ensure mortgage lenders were taking adequate steps to check the mortgage affordability of borrowers and hence reduce the risk to the wider economic system.

In the past borrowers could simply self certify their incomes and will go on to take mortgages that they likely couldn’t repay in full.

If interest rates rose, these borrowers would end up not being able to keep up on their monthly mortgage repayments and will eventually end up losing their homes through a home repossession.

There was also a serious issue with borrowers who took out cheaper interest-only mortgages with the hopes of being able to repay the capital outstanding on the mortgage at the end of the mortgage term with any rise in property value and hence rise in equity for the borrower.

Unfortunately when house prices crashed a lot of these borrowers found themselves with no suitable capital repayment vehicle and ended up losing their homes through home repossessions or having to repay the capital borrowed by selling their homes and borrowing the deficit from a new lender or their family.

In short, most of these borrowers ended up in more debt or homeless and little to show for it.

In the UK the mortgage market review was conducted and mortgage credit directive rules introduced by the FCA.

This means mortgage lenders now have to carry out strict mortgage affordability checks on borrowers income, future plans and their ability to continue repaying the mortgage even with an interest rate rise. This last part is known as a mortgage stress test.

How hard is it to get a mortgage?

Getting a mortgage is slightly hard. This is because you will need to have a good credit score, a sufficient mortgage deposit, have a good income, be purchasing a suitable home and a reliable prospect of earning at this rate in the future. Aside from this, you may need to meet the mortgage lenders criteria which differ amongst various mortgage lenders and pass a mortgage stress test.

Aside from the obvious facts, getting a mortgage may appear as an easy task but getting a suitable mortgage with affordable rates may be a much harder task.

Sure, you might be able to get a mortgage but if you are paying double the rate due to a bad credit score, a low mortgage deposit or not buying a suitable property then you may still consider it hard to get a mortgage or at least a suitable mortgage.

What makes it hard to get a mortgage?

Some of the things which make it hard to get a mortgage include:

Mortgage deposit

Saving for a mortgage deposit is likely one of the main factors that getting a mortgage could be considered as something hard to do due to the fact that house prices are rising and hence the mortgage deposit requirement is also rising. 

Mortgage lenders have however adapted to this problem and reduce the mortgage deposit requirement they used to require from about 25% to 5% but this is usually only available for residential mortgages.

Aside from this, the Government has also stepped in to provide first-time buyer government schemes and home mover schemes which allow more people to be able to afford the initial cost of getting a mortgage: the mortgage deposit.

In some cases, these first-time buyer government schemes will reduce the amount of the property price and thereby increasing the amount of mortgage deposit you have in relation to the property value.

Government schemes help you reduce the amount of mortgage deposit you may need to put down, reduce the price of the property or create a structure that increases your mortgage affordability much sooner than it would have been.

Some of these include first-time buyer government schemes whilst others in this list are accessible to you even if you are not a first-time buyer.

Government schemes are not available to you if you are getting a buy to let mortgage.

The Government schemes include:

• Lifetime ISA– gives you a government bonus of £1,000 if you save a maximum £4,000 a year.
• Help to buy ISA– gives a maximum bonus us £3,000 if you save the maximum allowed of £12,000. Before you get either you should consider which is better. Lifetime ISA vs Help to buy ISA.
• Help to buy equity loan– gives you up to 40% as a 5-year interest-free equity loan. You begin to pay interest at 1.75 % after the fifth year and 1% plus RPI for every year thereafter.
• Shared ownership– You can buy between 25% to 75% of the property initially with a shared ownership mortgage and then buy more using a staircasing mortgage.
• Armed forces help to buy– similar to the help to buy equity loan but specific for the armed forces personnel giving them an increased chance of acceptance.
• Rent to buy– This is the right to buy scheme on which this guide is currently discussing. A different marketing name is just used. Watch out for this when shopping to avoid missing out on eligible properties due to confusion.
• Right to buy– allows you to buy your home at a discount price.
• Preserved right to buy– same as above.
• Right to acquire– similar to the above.

Depending on where you live, you may also be able to take advantage of home buying schemes provided by your local council. Example: In Norwich, the local councils provide the Norwich home options scheme.

Rising house prices

Rising house prices are also one of the major factors which make getting a mortgage much harder.

As house prices the mortgage deposit requirement for them rises, even with the low mortgage deposit requirement most mortgage lenders require.

E.g  A 5% mortgage deposit requirement on a £200,000 house would be £10,000 whilst a similar 5% mortgage deposit on a £350,000 would be £17,500.

A significant rise of £7,500.

Mortgage lenders requiring a 5% mortgage deposit will also usually have a cap on the property values and overall mortgage balance on which they will offer a 5% mortgage deposit requirement.

This means that as property prices and subsequently the amount of mortgage the borrower needs rises, the mortgage lender will have higher mortgage deposit requirements which makes getting a mortgage much harder.

The same goes for government schemes which all have a maximum house price on which you could use them.

Although the stamp duty relief doesn’t have anything to do with how hard it is to get a mortgage, the first time buyer stamp duty relief also has a maximum house price cap of £500,000 at the time of writing.

The mortgage rates and economy

Another major factor concerning how hard it is to get a mortgage is the mortgage rates and how the economy affects that.

When the economy is doing good mortgage rates tend to be high. 

This is due to the fact that lenders have so much demand for mortgages that the rates naturally rise. In some cases, dependant on the supply of money and supply of mortgage lenders, competition may drive mortgage rates down.

However, in the time of economic crisis or a recession, the Bank of England usually sets the base rate very low in order to attempt to kickstart the economy. 

This Base rate is usually followed by several mortgage lenders and accordingly, they may set their mortgage rates low. 

This, however, isn’t always the case and in some cases, mortgage lenders will raise their mortgage rates quite high in order to react to the supply of money and the risk of lending at that time.

The current mortgage rates could make it hard for you to get a mortgage, depending on what they currently are.

Your credit score

Your credit score is, of course, a very important factor in regards to how hard it could be to get a mortgage.

If you are unsure of what your credit score is then you should check your credit score from the four credit bureaus in the UK: Experian, Crediva, Equifax and Transunion.

Some of these credit bureaus may charge you a fee to view your credit report so what you can alternatively do is request a statutory credit report which is a free credit report which each credit bureau must provide to you upon you requesting it.

Alternatively, you can also use credit score services such as Checkmyfile and clearscore to check your credit report.

A low credit score or bad credit may make it very hard for you to geta mortgage or a mortgage with a good rate.

This could mean you have a very high monthly mortgage repayment.

Having a good credit score is also very important so you can ensure that you get a mortgage and a mortgage with a good rate.

When referring to bad credit, this includes:

• Debt management plans
• County court judgements
• Defaults
• Arrears
• Missed credit repayments
• Payday loans
• Bankruptcy

Some of the tips and best practice to boost your credit score include:

• Avoid missed credit repayments
• Get on the electoral roll
• Avoid making too many credit applications in a short time
• Avoid late payments
• Keep your credit utilization below 30%
• Avoid payday loans
• Get a credit builder card or loan(such as Loqbox) to show good credit repayment behaviour

The mortgage stress test

The mortgage stress test is another reason why getting a mortgage may be much harder.

“ The mortgage stress for residential mortgages mostly involves the mortgage lender looking to see if the borrower will be able to continue repaying the mortgage comfortably from their monthly disposable income in the event of an interest rate rise.

Different mortgage lenders will use different percentile point increases when performing a mortgage stress test but this may be based on the type of mortgage or your circumstances as a borrower.

If you are self-employed you may find that the requirements are much higher. 

The same can be said for someone with bad credit.

A mortgage lender can then determine what income multiple they will give you based on the results of your mortgage stress test.

In fact, the mortgage stress test starts at the point in which the mortgage lender evaluates your mortgage affordability.

The mortgage lender will group your transactions into basic expenses, lifestyle expenses and committed expenses in order to work out what your true mortgage affordability is.

Lifestyle expenses(gyms, restaurants, holidays etc) are expenses which you could easily cut out in order to save more money for your committed expenses such as your monthly mortgage repayments or other credit repayments.

By conducting a mortgage stress test the mortgage lender will be satisfied that you can repay the mortgage now but also in the event of any changes in the future.

A mortgage stress test is part of the mortgage lenders internal risk scoring and as such, you may not be privy to this information.

Using an interest rate rise during the mortgage stress test was introduced by the FCA in 2014 after the mortgage market review.

The FCA asked mortgage lenders to consider if borrowers could still afford their monthly mortgage repayments if at any point over the first five years the mortgage rate was to rise by 3% higher than the mortgage rate at the origin of the mortgage.

This will also be the case if your mortgage rate changes after a fixed introductory period.”

Source  – Huuti “Mortgage stress test”

Use a mortgage calculator

You can use a mortgage calculator to see how much your monthly mortgage repayments could be.

Use a mortgage broker for your mortgage in principle

You may want to use an independent mortgage broker to help you get a mortgage on your new home.

Mortgage brokers are important as they can access mortgage products from across the whole of the market in some cases.

This could be over 11,000 mortgage products. This may have some advantages rather than going directly to a mortgage lender.

A mortgage broker will look to understand your financial circumstances and then provide recommendations on which mortgage products may be suitable for you based on your mortgage affordability.

After giving you these mortgage recommendations, most mortgage brokers will seek your consent to apply for a mortgage in principle. 

This will allow you to shop for your home as more estate agents and sellers may take you seriously and it will also give you confidence that your mortgage is indeed a possibility before you make a full mortgage application. 

Once you have found a home you want to buy and are satisfied with the mortgage offer for your mortgage then the mortgage broker will then look to get you a mortgage offer.

This will come with a key facts illustration document that details the features of your mortgage including how much you will pay per month.

It will also contain information on if there are any limits such as early repayment fees, or annual overpayment limits.

If you are happy with everything you can then go on to secure your mortgage with the help of a conveyancer.

Your conveyancer will manage the legal searches on the property to ensure there aren’t any issues with it.

They will oversee the sales agreement to ensure it is in your best interest, they will manage the transfer of mortgage funds, exchange contracts with the seller or their conveyancer, and set a completion date with the seller or their conveyancer.

This will then bring an end to the conveyancing process, at which point you will receive the keys to the house and move in.

How hard is it to get a mortgage with bad credit?

Getting a mortgage with bad credit could be very hard due to the fact that most mortgage lenders prefer to give mortgages to borrowers with a good credit score.

How fast can I get a mortgage?

You can get a mortgage within as little as 4 weeks if you have all your mortgage documents ready and have an experienced mortgage broker who is ready to assist you.

In this brief guide, we answered the question “How hard is it to get a mortgage”.]

If you have any comments or questions please let us know.

If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.

You can also contact the debt charity “Step Change” if you are in debt and need help.