Mortgage Myths Busted

couple dicussing mortgage myths

Searching for a mortgage can be a frustrating process, especially if you fall for the many common misconceptions about mortgages. The myths around mortgages are abundant and unfortunately most of them are perpetuated by the media and so-called money experts.

The good news is these myths can be dispelled once and for all and in this guide, we delve into the misconceptions and give you the correct information. Armed with this information you can approach your mortgage search with confidence and find the perfect product for your situation.

Let’s discover the myths perpetuated by mortgages and correct the record.

The Best Place to Get a Mortgage is from Your Bank?

A large portion of people seeking out a mortgage will approach their bank in the first instance. The reason for this is twofold. First banks advertise their mortgage products to their customers in a way that suggests because of their existing financial relationship there are special products available to them.

Another issue is banks also suggest getting a mortgage with them is more likely if you already bank with them.

The truth is, at best the marketing of preferential products is misleading and you are not more likely to get a mortgage with your bank because you bank with them in most cases.

There is an exception to this rule if you are a high net worth individual and are banking with a specialist bank such as Coutts. In these rare cases, you are more likely to secure finance because of your existing banking relationship.

For everyone else though, it is best to shop around the mortgage market and find a lender who is best suited to you rather than approach your bank only. You can do this by using a Whole of Market mortgage broker, and you never know, it might be the case that your existing bank happens to be the best lender for you. Or, your broker may find a lender that you were unaware of that is not suitable for your needs.

At least in this circumstance you will know you checked other products and have confirmed your bank is best.

You Should Wait to Find a Property before Considering a Mortgage

Perhaps the most egregious mortgage myth is that you should wait to find a property before reviewing mortgage options. The truth is this is the reverse of what you should do.

When you find a property before looking at a mortgage you are essentially gambling that you will be able to find a mortgage for the property. There are two main reasons why this gamble may fail to pay off:

  • The property is not mortgageable
  • The amount you need to borrow is too large for your affordability

Unfortunately, people find themselves in the position of chasing a mortgage product, desperately hoping they can make ends meet and a lender will offer them enough to buy the property.

By searching in advance for a mortgage, you will know exactly how much you can borrow and the best lender for your circumstances. You can then tailor your property search to finding a property in budget and meets the lender’s criteria.

You should contact a whole of market broker, that is ideally fee-free like Boon Brokers, at the start of your mortgage journey.

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The Property Ladder is Not for Young People

It would be an error to pretend that young people have an easy time getting on the property ladder. The fact is, as we grow older our earning potential increases and this makes affording a mortgage easier.

However, with the right knowledge, young people can access the mortgage market and have advantages over older borrowers. For example, most older applicants find their mortgage terms limited due to age and have higher monthly mortgage payments compared to younger borrowers.

There are also government schemes and benefits that help young people buy their first property such as the First Homes Scheme and the first-time buyer’s stamp duty cuts.

The biggest barrier to entry for a young person buying a house is normally raising a deposit. Saving a deposit to cover at least 5% of the purchase price is a significant challenge in the present U.K economy due to the cost-of-living crisis. For this reason, most first-time buyers purchase with a partner as this makes raising a deposit far more manageable.

Mortgages Are Not for the Self Employed

Self-employed people may struggle to get a mortgage in certain circumstances. For example, if you have not been trading for at least a year, you will not be accepted for a mortgage. The reason for this is that lenders can only accept income that has already been taxed, or will shortly be taxed, by HMRC. As self-employed applicants only pay tax after their annual accounts have been published, they must wait for at least a year before they can apply for a mortgage.

Even though there are currently lenders that can accept just 1 year of accounts, most lenders require at least 2 years of accounts before they can accept a mortgage application from a self employed applicant.

There are many lenders who have mortgages designed to be favourable to self-employed people and a mortgage broker will be able to advise on how much you can borrow. There are lenders who will even let you use company accounts as proof of income or allow you to borrow money with only 1 year’s accounts.

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The Lowest Interest Rate is the Best Mortgage

The lowest interest rate is a big draw for borrowers, especially those keen to keep their monthly mortgage payment at a minimum.

Low interest rate mortgages may not be best for your personal situation though. For example, one of the largest UK lenders offers low interest rate mortgages with hefty Early Repayment Charges. This type of product would be unsuitable if you are looking to move soon as the cost of the charges will often outweigh the amount you saved on the monthly mortgage payments.

Mortgages are complex financial products. Overall, you should consider all product features before deciding on a mortgage. A mortgage broker can be invaluable for this reason, they will not only find you the best mortgage product for your situation but also the cheapest mortgage too.

You Need a Large Deposit for a Mortgage

Historically, this was truer than it is now. Most mortgage products require a deposit but the amount you need to put down can be as little as 5% of the purchase price/valuation. In the past most lenders had a limited range of products and insisted on higher deposit amounts.

However, remember that to be eligible for a 5% deposit, you need to be able to afford the remaining 95% mortgage.

You Need a Good Credit Score for a Mortgage

You can have almost any credit score for a mortgage product and there are a range of lenders who offer mortgages for those with bad credit.

These mortgages tend to have a higher interest rate to reflect the risk of lending. However if you have a bad credit score and want to get onto the property ladder, these lenders are ideal.

It is Cheaper to Rent than Buy a House

This is not necessarily untrue, but it is misleading. The private rental and mortgage markets are impacted by national interest rates.

When interest rates are high, you may find that a mortgage is a lot more expensive compared to private rent. When rates are low there is relative parity between monthly rents and mortgage payments.

Mortgages have two added advantages as well. Over time your mortgage payments will decrease as you make payments on your mortgage. In comparison rents are unlikely to drop and tend to increase over time.

Secondly, a repayment mortgage goes toward owning an asset – namely the house you live in. You are getting a return on your mortgage payments. In most cases with rent, you are paying toward someone else’s Buy to Let mortgage and you will never see any of the money you pay back.

Speak to a Specialist

Boon Brokers is a Whole of Market Mortgage, Insurance and Equity Release brokerage. Boon Brokers offers fee free mortgage advice and can address any mortgage concerns or questions you may have.

Contact Boon Brokers to book your mortgage consultation today.

Gerard BoonB.A. (Hons), CeMAP, CeRER

Gerard is a co-founder and partner of Boon Brokers. Having studied many areas of financial services at the University of Leeds, and following completion of his CeMAP and CeRER qualifications, Gerard has acquired a vast knowledge of the mortgage, insurance and equity release industry.