How to be mortgage-ready by the time interest rates start to drop

view original post

The Bank of England base rate has stood at 5.25% since August 2023, but this could change when the next base rate decision is announced on 1 August 2024. 

The base rate helps inform the interest rates for mortgages, savings accounts, credit cards, loans and everything else that comes with an interest rate attached.

Although the base rate has remained the same, average mortgage rates have climbed steadily in recent months, with the average two-year deal rising to 5.93% at the beginning of June and the average five-year deal hitting 5.5%. 

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don’t miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don’t miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

The standard variable rate (SVR) is now an eye-watering 8.18%, costing borrowers an extra £287 every month on a typical two-year deal, assuming a £200,000 mortgage with a 25-year term, according to Moneyfacts.

Unfortunately, those high mortgage rates are keeping many would-be homeowners from buying a home. However, you can take several steps now to become mortgage-ready when interest rates finally start coming down.

Run the numbers and save your deposit

First, you’ll need to figure out how much of a mortgage you can afford and start pulling together the deposit. A great place to begin is with a mortgage-affordability calculator like the one offered by the government-backed MoneyHelper site.

Generally, the most you will be able to borrow against a home purchase is capped at four-and-a-half times your annual income. When using a mortgage calculator to run the numbers, be sure to include related expenses like council tax, household bills, and any maintenance costs in the amount you plan to borrow. Don’t forget to factor in other regular living expenses beyond those related to the home and mortgage.

Additionally, you’ll need to have a significant amount of money to put down as the deposit. At a minimum, you will need at least 5% of the purchase price of the property you want to buy, but you won’t get access to the best interest rates unless you can deposit at least 10% of the price.

Of course, the larger the percentage of your deposit, the greater the chance you’ll be approved for a mortgage – and you’ll potentially get a lower interest rate too.

Get your credit file into shape

Once you know how much you can borrow and how much you need to deposit to get the interest rate you need, you can then get down to the details, starting with your credit file. Credit reference agencies determine your credit rating and score based on your credit file, and lenders use your rating and score to decide whether to give you a loan and if so, how much to loan to you.

Credit reference agencies look at your current and previous handling of credit cards, personal loans, and any other loans to see whether you have made payments regularly and on time. Typically, they look at the last six years.

You have several options to improve your credit file:

  • Make all payments on time on every account, including those that may not involve borrowed money, like a mobile phone bill.
  • Use the credit you have responsibly. Don’t borrow more than you can repay on time, and don’t go over your credit limit. Credit cards can be especially helpful with establishing a track record of making on-time payments and demonstrating that you use credit responsibly.
  • Settle outstanding accounts or county court judgments you haven’t paid yet. A common problem is fee disputes with mobile phone providers that prompt the consumer to switch providers, leaving the final balance left unpaid. It’s wise to settle accounts such as these in plenty of time before applying for a mortgage.  
  • File a disassociation request with a credit reference agency to sever credit-related ties with someone you formerly had a joint account with, especially if their credit is bad
  • Sign up for the electoral register at your current address. Many people fail to register after they move, which causes problems when applying for a mortgage.
  • Update your current address on your driving license and with your bank. Many people fail to do this, and it causes problems when they apply for a mortgage.
  • Reduce the amount of debt you have outstanding.
  • Cancel any credit cards you don’t use.

Meanwhile, you can also avoid doing several things to keep your credit file from getting worse:

  • Don’t submit lots of credit applications in a short period of time
  • Don’t continue to apply for credit if your credit is already bad
  • Stop withdrawing cash from your credit card
  • Don’t move too often

How to get organised to get the right mortgage deal

As the time to apply for a mortgage approaches, you’ll also want to organise all the information and paperwork you need to submit with your application, including:

  • Proof of your regular income
  • Proof of other income like commission, overtime, bonuses, trust funds, or state benefits
  • Details about your current debt and regular spending habits, including family and property commitments, credit cards or overdrafts, or any other credit agreements.
  • Details about what could impact your financial position in the future, like your planned retirement age, plans to cope with serious illnesses or other major life changes impacting your income or expenses.
  • Important documents like bank statements, evidence of your deposit, or residency status.

Buying a home can be one of the most exciting steps anyone can take as they grow older, but it’s important to understand all the implications of having a home loan before you sign on the dotted line. 

However, with a little planning, you can be mortgage-ready in as little as a few months, depending on the status of your credit file and savings deposit.