We dispel some of the common myths people have about mortgages and explain the reality of each one.
Myth 1: You need a large deposit
This is not the case. If you’re a first-time buyer, you may have been saving like mad, thinking you need to find a sizeable sum to put down on your first property. Fortunately, things have recently improved for first-time buyers. Yes, things were tough last year. Many lenders withdrew 90 per cent mortgage loans due to high demand for mortgages because of the stamp duty holiday. However, many lenders have since reintroduced higher borrowing levels. Many 90 per cent loans are making a comeback. Accord Mortgages has just announced a new 95 per cent mortgage, so there are now more options for first-time buyers. And during the March 2021 budget, a government-backed 95 per cent mortgage scheme was announced, which will open the market up even more for those with smaller deposits. The scheme launches in early April.
If you’re applying for a buy-to-let mortgage though, you will need a larger deposit of at least 25 per cent of the property’s value. Most buy-to-let mortgages are interest only. This means you pay off the interest each month, but the amount of the loan stays the same until the end of the mortgage term when you repay the loan in full.
Myth 2: You can’t get a mortgage if you’re self-employed
While it may be a bit more complex to apply for a mortgage loan than if you were in full-time employment, you can get a mortgage if you’re self-employed if you can prove you have a regular income. If you’ve been turned down for a mortgage before, maybe you weren’t talking to the right lender. It’s worth speaking to a reputable mortgage broker who will have access to a range of mortgage loans.
You’ll need to provide bank statements and an SA302 form that provides evidence of your income for each tax year. You’ll also need two years’ worth of accounts if you’re running a limited company. Some lenders will accept accounts for one year. If you’ve not been self-employed for very long, it’s worth speaking to a broker for advice.
Myth 3: You can’t get a mortgage if you work as a contractor
Again this isn’t true. If you have a good track record of working regularly and the paperwork to prove it you should be fine. You’ll need to show you have a regular income without any long gaps in between contracts. Lenders will normally take your day rate into consideration and multiply it by the number of working days in a year to decide what you can borrow. You will need to supply copies of any contracts you’ve had over the past two years, along with bank statements, invoices and full business accounts if you’re a limited company. For more information, download our free guide to getting a mortgage as a contractor.
Myth 4: You’re stuck with your current mortgage deal
Even if you’ve taken a fixed two or five-year term for your mortgage deal, that doesn’t mean you have to stay put. If you think you could be getting a much better deal, then it’s worth looking into remortgaging, as this could save you thousands. Even if you have to pay an early repayment charge, it’s worth looking at how much it would cost to remortgage, as it could still be worthwhile. It’s essentially a case of running the numbers.
Myth 5: You can’t get a mortgage with a poor credit history
While it may be more challenging to get a mortgage if you’ve had financial problems in the past, it may be possible. You may need to apply to a specialist lender. Most high-street lenders have automated systems that approve or reject mortgage applications without looking at individual circumstances. A specialist lender will have the time to look at your situation more closely. It also depends on the nature of your credit problems. If you were given a debt management plan in the past this could work against you, as it essentially shows that you lost control of your finances. However, one or two missed or late payments (while not ideal) may not be a barrier to getting a mortgage. Again speak to a good broker. A specialist lender will charge a higher interest rate as you’re considered to be more of a risk. However, credit issues will disappear from your records in six years’ time, so it won’t be forever.