Securing a mortgage is essential to buying a house. A Mortgage Agreement in Principle (MIP) is proof that you have the funds available, which sellers and estate agents are keen to know before accepting offers. Making and accepting an offer is more legally binding in Scotland than in the rest of the UK. Therefore, understanding the process of applying for a mortgage in Scotland should be a priority before you start looking at properties.
Who is eligible for a mortgage in Scotland?
Eligibility criteria for a mortgage can differ from one mortgage lender to another. However, some of the basic criteria are as follows;
- You should be a UK resident.
- You have to be 18 years of age or above to apply for a mortgage, and the mortgage term should end before you reach 80. If it is a joint mortgage, the oldest person’s age is taken into account.
- Those who are employed must be in permanent employment and have been employed with their current employer for at least 6 months.
- Self-employed applicants must have a track record of their business for at least 2 years and produce evidence of income for that period, together with a projection/estimate of income for the coming 12 months.
- Contractors on a ‘Contracts for Services’ basis should have been engaged in the contract for a period of 3 years or more. They should provide proof of tax assessments for the last 3 years that show a level or progressively-rising income.
- Your name should be on the electoral roll as well as guarantors at all addresses within the previous three years. If not, you should be able to produce proof of occupancy.
The Bank of England has scrapped its affordability tests offering more flexibility for lenders and borrowers.
Types of mortgages
Fixed-rate mortgages – these have interest rates that do not change with the Bank of England base rates. You will pay the same amount for a set period, such as 2 or 5 years. Fixed-rate mortgages can protect you from future interest rate increases.
Tracker rate mortgages – these have a variable interest rate. The interest rate will rise and fall in response to the Bank of England’s base rate for a set period of time. If the rate drops, your monthly payments will reduce, and if the rate goes up, you will have to pay more on your mortgage payments.
Buy-to-let mortgages – If you are buying a property to rent out like an investment, these mortgages are specifically designed for that. They have higher interest rates and require bigger deposits.
Interest-only mortgage – you will pay only the interest on your mortgage and nothing on the capital you borrowed. You need another repayment plan to pay the full amount you owe at the end of the mortgage term.
What is the documentation needed?
Mortgage lenders will need to look at your income and outgoings to decide whether you can afford the mortgage. You will have to produce payslips and bank statements for the last 3 months. And if you are self-employed, they will need copies of your tax returns and business accounts prepared by an accountant. Proof of identity is also required as per the rules by the current Money Laundering Regulations and the Regulator.
What is the initial deposit amount?
A deposit of at least 5-10% of the overall price of the property should be put down as a deposit for the average mortgage on a house. Bigger the deposit, the smaller your mortgage and the interest you have to pay. Having enough funds for a larger deposit could also help you get a better mortgage deal.
How do you get a good rate?
Improving your credit score will boost lender confidence in you. All lenders refer to your credit score to assess the risk of offering you credit. A higher credit score means that it is highly likely that your application will be accepted. Low-risk applicants get lower interest rates and a higher credit limit.
Make regular card payments and settle debts. Review your credit score. Correct any errors on your credit file with the bank or with the credit reference agency.
Other factors to consider
- A deposit is just as much as important as your credit score. Make sure you have enough money for one before approaching a lender.
- First-time buyers can get financial assistance from government-funded shared equity schemes like LIFT.
- Look at what different mortgage lenders are willing to offer you.
- Hire a mortgage broker if you are unsure of what you need or can have. Avoid property chains by choosing new build homes.
Securing a mortgage is the first practical step to buying a new home. Declined applications or multiple applications within a short time can affect your credit score badly. So, make sure you are prepared and well-informed before getting the ball rolling. GS Brown Construction supports you every step of the way of the buying process.