Understanding The Power of Compounding Interest
Buying a house is said to be one of the most stressful experiences you can have, and it’s easy to see why. In all likelihood, you will be taking on the biggest loan and making the most expensive purchase of your lifetime.
The figures are overwhelming, and once you start shopping for a mortgage, the jargon can be mind-numbing. But shopping around and making sure you get the best deal possible is vitally important.
If you borrow $200,000 at a 5% interest rate for 25 years then the amount you repay will be approximately $350,882. The same amount at a rate of 2% will total $254,357 over the same time period. That 3% difference adds up to almost £100,000 over the repayment term: that’s half the value of the initial loan in extra payments! This is the power of compounding interest working against you.
Mortgages are currently available at less than 2% (some are even less than 1% at the time of writing) so it pays to shop around and apply for the best rate you can.
But the ultimate decision about the rate you are eligible for will largely depend on your credit score and a variety of other factors such as your employment status and income, your existing debt, how much you’ve saved as a deposit, etc.
Importance of Financial Attractiveness
You’ll need to make yourself as attractive as possible to lenders if you want to get the best deal. Lenders will want to be assured that the money they lend is in safe hands, and that you’ve got the financial discipline required to pay back your mortgage. It all depends on your credit rating (also known as your credit score). The lower your credit score, the higher a risk you pose. And the more risk they think you pose, the more expensive your mortgage will be in the form of higher interest rates.
Luckily, there are a few things you can do to convince lenders that you deserve their best deals.
Here are ten top strategies that can significantly boost your chances of getting a mortgage at a fantastic rate.
Increase your credit score.
Even having a big deposit and a decent salary isn’t enough to guarantee you a mortgage anymore. Your credit score is the single most important factor that will dictate whether or not you’ll get a mortgage and the rates you’ll be able to get. Click here for important tips on increasing your credit score.
Show evidence of stability.
Banks want to be assured that the person who is going to borrow hundreds of thousands of pounds is a safe bet. They will look far more favorably on someone who appears settled and who appears likely to stick around and pay their debts. This includes being at the same address for at least 3 years.
Check your connections.
You need a good, clean credit history to get access to the best mortgage rates on the market and not being financially connected to anyone with poor credit is an important part of this. Living at the same address does not make you financially connected to someone else but joint mortgages, bank accounts and credit cards will. If you suspect that you have any financial connection to a friend, relative or ex-partner then it might be worth double checking before making your mortgage application.
Your employment status matters.
Getting a mortgage can be a lot easier the longer you’ve been in full and permanent employment. The income is easy to prove, the paperwork is easy to find and the bank has no reason to worry about your long-term ability to keep up your payments. Being self-employed can make the application process a little more complicated, especially if you have not have steady work and at least three years accounts to show.
So if you are considering a change of career then it might be worth delaying any such moves until after you buy. If you are already self-employed then there is a chance that not all lenders will be willing to offer you a mortgage. In this situation a good, impartial, mortgage broker might be able to help.
Have a diverse portfolio of credit accounts.
Prove that you are good with credit by showing a great background of borrowing and, more importantly, paying back. Get a credit card and use it, paying off the balance in full each month. If you have a loan then make sure your repayments are regular and up to date. Missed payments and defaults will show up on your credit report and could seriously harm you chances of getting any mortgage.
Keep your credit balances low.
This is all about how much credit you have available to spend on credit cards and overdrafts. The lower the balances on your credit cards, the more points you will gain. Getting too close to your limits makes it seem you’re at the edge of your finances. According to credit agency Experian, if you have debts, lenders prefer that they make up less than half your available credit.
So, you’ll want to avoid using more than 40% of the available credit you have on any credit lines at any time during the month. You can lose hefty points for having maxed out credit accounts because it’s a sign of bad money management. Curb that urge to spend more until you’ve got the keys to your new home.
Reduce your available credit.
Not many people realise that the amount they can borrow is adjusted according to the amount they already have access to. No-one can repay unlimited amounts of money so when you apply for credit, the total amount of credit you already have access to is taken into account, even if you have not borrowed it. Having access to multiple credit and store cards with high limits will reduce the amount you can borrow so make sure you keep on top of your accounts and close any that you do not need.
Get registered on the electoral roll.
This is huge in the UK! It is absolutely essential that you have been on the electoral roll. While it is not impossible to have a perfect credit score without being on the electoral roll, it’s practically impossible to get a mortgage without being listed. If you aren’t registered on the roll, when the lender comes to double check the name and address details you’ve supplied on your application, alarm bells will ring. So, if you want to give yourself the best possible chance of obtaining a mortgage, make sure you are registered on the electoral roll, every single year.
Payday loans can kill mortgages.
Avoid Payday loans like the plague, and not just because they are hideously expensive. Some mortgage lenders will simply reject anyone who has had a payday loan because it’s an example of poor money management.
Save for a sizeable deposit.
The bigger your deposit, the better your mortgage rate will be. If you can raise 30% of the cost of the house then you will be able to get a much better deal that if you only have 5%. If you do have only 5% then it might be worth considering the Help to Buy scheme which lends house buyers up to 20% of the house purchase price at a very low rate, in order to boost their deposit. Your mortgage will cover the other 75%. More information can be found here: https://www.gov.uk/affordable-home-ownership-schemes/help-to-buy-equity-loans
Additional Tips to Boost Mortgage Chances
Do not apply for credit shortly before a mortgage. Any application for credit will trigger a credit check which can then take several months to drop off your credit report. Multiple applications, or even refusals, are even worse. If you need new car or are tempted by the great deal on a new store card you need to decide if it’s worth risking your mortgage for. If not, then wait until you have moved in to your new house.
Ensure personal details and financial information are consistent.
Now is the time to check that you know the dates of your last house move or job start and make sure you use the same address on all paperwork. It might sound silly but if your details don’t add up then you might need to start the whole process again. Addresses, particularly, can be an issue; if you have a name and a number then make sure you always use the same one.
Close old inactive accounts.
Now is a great time to take stock of your current financial situation and check that you don’t have any old, forgotten accounts lingering somewhere. Finding an old account with some long lost childhood deposits is a bonus!
Correct errors in your credit report with all three reporting agencies.
It is important to make sure your credit report is flawless and free of errors. Your credit reference files, held at Equifax, Experian and Callcredit, contain enormous amounts of data about you. If checking three agencies sounds like a lot of trouble (especially after you have ploughed through all of the tips above) then you might consider a service which does the work for you. In the UK, Checkmyfile.com allows you to check your credit report from all three reporting agencies at once. Better still, you can sign up for a free trial and not spend a penny today!