THOUSANDS of aspiring homeowners could be delaying their plans to bag a property because they mistakenly believe they won’t be able to get a mortgage, new research has found.
A survey of more than 1,000 prospective first-time buyers by Lloyds Bank found more than half – 58% – thought having existing debt would stop them from being approved for a mortgage.
Meanwhile, over a third (37%) thought having more than 20% as a deposit was essential to getting a mortgage.
Neither of these assumptions are correct – lenders do not expect you to be completely debt free in order to get a mortgage.
It is more important to have a good credit score, which suggests you can keep on top of payments, and ensure you can comfortably afford the mortgage repayments.
And many lenders will offer mortgages where you have a 10% deposit or even as little as 5% in some cases.
Other factors that people thought could stop them getting a mortgage included using an overdraft (40%), receiving benefits (38%), and changing jobs recently (31%).
Meanwhile, 30% thought not having a perfect credit score could rule them out, while a quarter (24%) thought being self-employed would definitely put home ownership out of reach.
Lloyds said the findings suggest that misconceptions about mortgage eligibility may be creating an additional barrier to owning property in the UK.
Amanda Bryden, head of mortgages at Lloyds, said: “In reality, mortgage decisions are based on a much broader picture of your finances and circumstances.
“While affordability is important, don’t rule yourself out because of misconceptions about what lenders look for.”
Here are some of the biggest misconceptions – and the truth about them.
You need to be debt free
Existing borrowing like credit card debt, car finance, overdrafts or student loans do not automatically stop you getting a mortgage.
Lenders typically look at whether your existing debt repayments are affordable alongside your mortgage repayments and other financial commitments, and decide whether you can afford the loan.
However, it’s a good idea to try and keep a decent credit score as this shows you are reliable at paying what you owe back.
You need a 20% deposit
Some mortgage products are available with significantly smaller deposits than many people realise, meaning buyers may be able to purchase a home sooner than they think.
Most lenders offer 90% loan-to-value mortgages, which means you only need a 10% deposit, while many will offer mortgages with 5% deposits or in some cases even less.
For example, NatWest, Lloyds and HSBC are among high street names offering 95% loan to value mortgages. NatWest says it could lend up to £570,000 with a 5% deposit.
It’s a good idea to speak to lenders in advance and figure out what they could offer you before ruling yourself out.
You need a perfect credit score
While it’s a good idea to keep a good credit score, a poorer one won’t automatically stop you getting a mortgage.
Most lenders will take a range of factors into account when assessing your application, so other factors could outweigh a lower score.
However, having a higher credit score could mean lenders offer you more favourable interest rates.
You can’t have an overdraft
Having an overdraft is another factor that does not automatically stop you getting a mortgage, as it is considered normal debt.
However, make sure you can afford to pay back your overdraft or stay within it, if there is no interest, alongside your mortgage repayments.
Self-employed people and those on zero hours contracts can’t get a mortgage
Being self-employed doesn’t mean you can’t get a mortgage – you may just have to prove your income in a different way.
Usually, a lender will decide how much to offer you as a loan based on your salary.
If you’re self-employed, you can demonstrate your income by providing tax calculation summaries that show your total taxable income for those tax years.
These can be downloaded from your online Government Gateway account.
You can also simply use bank account statements to demonstrate the amount of income you have coming in and out. The longer you can demonstrate consistent income, the better.
You could also use accounts prepared and signed off by a professional accountant.
For those on zero-hour contracts, lenders will look at your income and how consistent it is, and assess it alongside other factors like your deposit size and other outgoings.
Benefits claimants can’t get a mortgage
Receiving benefits may make it more difficult to get a mortgage, but it does not automatically rule it out.
If your benefits make up the majority of your income, some lenders may view that as unstable income because your situation could change, meaning you would lose your income amount.
It is usually easier to get a mortgage if you are also working alongside receiving benefits.
Ask your mortgage lender what their rules are before applying.
You can’t have changed jobs recently
Getting a new job should not be a barrier to getting a mortgage.
Most lenders like to see job stability because you know how much income you have coming in, and some lenders may not accept you while you are during a probationary period with a short notice period.
However, some lenders will base their decision off a permanent job contract or evidence of recent payslips.
Again, ask your lender what paperwork they will need before applying, as some will be more flexible than others.
Earning less than £50,000 a year
There is no requirement for you to earn more than £50,000 a year to get a mortgage.
The amount you need to earn to get a mortgage depends on the size of the mortgage you want to take out.
Lenders will typically let you borrow 4-5 times your salary. So, if you want to buy a £100,000 property, for example, you should only need household income of around £25,000 a year.
You can use a mortgage lender’s calculator to see how much you could borrow based on your household income.
Using Buy Now Pay Later
Using a Buy Now, Pay Later (BNPL) provider to purchase items will not stop you getting a mortgage.
BNPL is now a regulated form of credit and will be considered alongside other factors when applying for a mortgage.
As long as you have kept up with repayments and are not struggling to afford them, BNPL will not automatically be a barrier.
Being on maternity or paternity leave
Most lenders will accept applications while you are on maternity or paternity leave, as long as you can prove your future income and have a clear plan for returning to work.
Lloyds says your lender may just want to know you can afford the mortgage repayments or if your situation is going to change.
So, they may want to know a date you plan to return to work, evidence from your employer confirming your income when you return, and any extra outgoings with information about how you will cover them.
Ask each lender what they will need from you before applying.
Having student loan debt
Student loan debt is factored into your application alongside all your other existing outgoings.
When you apply for a mortgage, you will be asked roughly what you spend each month on other commitments, so you just need to let your lender know what you repay each month.
As long as you can comfortably afford the repayments alongside your mortgage payments, student loan debt should not be a barrier.
Make sure to compare a number of different lenders and consider speaking to a mortgage broker if you need help finding the best deals for your situation.
