Transcript

MARTIN LEWIS

Mortgages are a type of debt, and you need to remember that. We often don’t categorise them the same way, but they are. And in common parlance, they’re a debt secured on your home. So if you can’t repay, your home could be taken off you.

One of the key things to understand, whether you’ve already got a mortgage or whether you’re looking to get one, is three little letters: LTV. It stands for Loan To Value. In simple terms, how much of your house’s value are you borrowing? And it’s the value at the point that you’re getting the mortgage, or if you’re remortgaging, which simply means shifting to a new mortgage deal without moving house, at the point that your remortgaging. And I’ll come back to why that’s important in a moment.

Now, the key thing to understand here is the lower your loan to value, the better, because you’re borrowing less of a proportion of your house’s value, which means it’s less risky for the lender, so they’re willing to give you a better rate because of it. In fact, what tends to happen is these days, you can usually start to get mortgages around 95% LTV, or a 5% deposit for a first-time buyer. And it gets cheaper every 5%, 90%, 85%, 80%, 75%, 70%, 65%, 60%, until around 60% and then it doesn’t get that much cheaper.

So this is important. It means if you can find spare cash somehow to get yourself down to a lower threshold, you might be able to get a cheaper mortgage deal. It may mean at the point that you’re remortgaging, shifting deal, if you can find an extra 1,000 pounds that brings you down the threshold, you could save more than 1,000 pounds a year because of a cheaper mortgage deal. It also means that if you’ve had a mortgage for a long time, and your house price has gone up in value, even if you haven’t repaid anything, because it is loan to value, if the value goes up, the loan is a smaller proportion of the borrowing, and you may well be able to get a cheaper deal.

If you understand the concept of loan to value, you’re starting to get on the road to understanding how mortgages work. But in the old days when we talked about mortgages, it was all about what’s a good deal, what’s a bad deal, what you’re going to choose. These days, at the core to most mortgage decisions, is the question, will they accept me?

Because they no longer throw out mortgages willy nilly. There are two big things as well as LTV that affect whether you’ll be accepted or not. The first is your credit score. Each lender scores you differently based on its own wish list of what is a perfect customer.

So managing your credit worthiness at least a year in advance of getting a mortgage is important. Don’t get excess borrowing. Don’t forget to pay anything. Don’t make too many applications. All of those can hit your credit file.

Have as good and a clean a file as you possibly can that shows you’re a responsible credit citizen. And make sure you’re doing that in a good run up before applying for a mortgage. The second factor is affordability. Will you be able to afford the product? It’s the lender who will be defining that, and they won’t just be looking at the rate that they’re giving you. Can you afford to repay it?

There’ll be stress testing. If interest rates went up, would you still be able to afford the mortgage? And that means for those who are close to the brink of their finances and are borrowing quite a high proportion of their income, well, in the three to six months before making a mortgage application, I would suggest you go frugal so that your bank statements show there is room to be able to afford a new mortgage even if interest rates went up.

So where do you find the information on which mortgage lenders are more likely to lend to you or not? It’s very difficult. In fact often, it doesn’t really exist in the public sphere. Except many mortgage brokers have better access to that information than we as consumers do.

So when getting a mortgage, I’d be looking at best-buy tables to see, in a perfect scenario, what the best deal you could get is. But I’d also go and talk to a mortgage broker. They’re a mortgage advisor. Make sure it’s one who doesn’t charge you unless you get a mortgage through them. And in fact, there are some who are fee free who just take a commission from lenders. And you want one that’s going to look at as many different mortgage deals as possible.

Though you may be thinking, why are you telling me to go to a mortgage advisor if I’m doing a course about understanding mortgages? Well, there’s nothing wrong with getting advice even if you know what you’re doing. And they’re advisors. They’re not instructors.

They’re not here to tell you what to do. You need to understand the mortgage that you’re getting too, and then you can have a sensible, grown-up conversation with them about whether it’s the right or the wrong deal.