The mortgage landscape can feel complex, and although many people think that they understand the process in full, several common misconceptions consistently arise. These misunderstandings of the mortgage landscape can sometimes prevent potential buyers from taking their first step on the property ladder or prevent existing homeowners from securing a more competitive deal.
In this article, we break down some of the most common mortgage myths to provide you with greater clarity and reassurance. With a better understanding of the facts, you will be better equipped to make your next mortgage decision with confidence.
You need a large deposit to buy a home
The Myth
One of the most common misconceptions surrounding homeownership, especially for first-time buyers, is that a large deposit is essential.
The Reality
While it is true that a larger deposit can be helpful, especially in reducing your Loan-to-Value ratio and accessing better rates, several lenders will grant borrowers a mortgage with a deposit as low as 5%.
For example: To purchase a property worth £200,000 with a 5% deposit, the deposit required is £10,000. While this is still a substantial sum of money, it is considerably lower than what many may believe to be necessary.
For those unable to save any considerable deposit at all, there are several government schemes and unique lender products which can provide further assistance.
Several housing developers offer shared ownership schemes, whereby homebuyers purchase a percentage of the property, paying rent to the developer on the remaining owned portion. This further reduces the deposit amount required and may allow potential buyers access to higher-value properties.
Some lenders also offer specialised mortgage products aimed at helping those struggling to save for a deposit onto the mortgage ladder. Skipton’s Track Record Mortgage allows first-time buyers to borrow up to 100% of the value of the property, provided that they have a 12-month track record of consistent rent payments within the past 18 months, and can meet other affordability criteria.
Key Takeaway
While a larger deposit can reduce your monthly repayments and improve your mortgage rate, it is not a barrier to getting on the property ladder. A small deposit, combined with the right mortgage advice, can help make your next home a reality.
You must have a perfect credit score to get a mortgage
The Myth
One of the most common factors that people consider when looking to purchase a home is their credit score. There is a common belief that having a low credit score makes it impossible to borrow from a mortgage lender.
While it is true that a better credit score increases your chances of acceptance and potentially provides access to better rates, a low credit score does not automatically mean rejection.
The Reality
The truth is that mortgage lenders consider a wider variety of factors when considering whether to lend you money. These include your income, your affordability, any discrepancies on your credit report and the timeline associated with those.
While previous financial mistakes may impact on your ability to access the best rates on the market, some lenders will consider your overall financial habits rather than simply looking at your credit score.
While the main high street lenders may be more reluctant to lend to a person with a particularly low credit score, there are specialist lenders who focus on lending to people with adverse credit history.
Key Takeaway
While good financial history and strong habits are highly beneficial to help you secure the best rates possible, a low credit score is not a deal breaker in letting you access the property market. Working alongside a mortgage adviser can help you to understand the options available to you.
Being self-employed makes it almost impossible to get a mortgage
The Myth
Many self-employed people believe that securing a mortgage is extremely difficult, or even impossible, as they don’t have a traditional salaried job. However, this is far from the truth.
The Reality
Self-employed people are equally likely to gain access to mortgage lending. However, their process works slightly differently to those in full-time employment.
Typically, lenders will require proof of income over the past 1-2 years, commonly through:
- Tax returns.
- SA302 forms.
- Accountant-certified accounts.
This allows lenders to assess the stability and reliability of your income over time, with more consistent long-term earnings strengthening your application.
As is often the case, there are also lenders who specialise in mortgages for the self-employed or those with irregular income streams (such as contract workers).
Key Takeaway
Being self-employed is far from a barrier to mortgage borrowing, however does mean that lenders will consider your past earnings more so than for a person in employment. With the right mortgage advice and correct preparation, homeownership is entirely achievable.
A mortgage in principle guarantees you a mortgage
The Myth
Many people believe that once they receive their mortgage in principle (also known as an agreement or decision in principle) from their lender, their borrowing is guaranteed. However, this is not the case, as your mortgage in principle only serves as an indication of potential borrowing.
The Reality
Your mortgage in principle is a non-binding decision from a lender on how much you may be able to borrow. However, this is based on information that you provide to your lender and a soft credit check. The information you provide must be checked and a hard credit check must be completed prior to your borrowing being guaranteed.
Typically, this happens at the point where you submit your full application once you have found your potential next property.
Key Takeaway
Your mortgage in principle only serves as an indicator of potential borrowing, not a guarantee of lending. It is important to ensure that the information that you provide to your mortgage broker when securing your mortgage in principle is as accurate as possible to maximise your chances of ultimate approval.
You should always go for the lowest interest rate
The Myth
When considering which mortgage offer is best, many people focus entirely on the mortgage rate, assuming that the lowest mortgage rate is always the best product available to them. However, the interest rate attached to a mortgage only tells part of the story, and there are several other key factors to take into consideration.
The Reality
While a low interest rate can seem attractive, there are several other costs and features that should be taken into account.
Associated fees, term tie-ins, portability and flexibility are all key factors which can impact how suitable a mortgage is for your unique circumstances, and it may be the case that the benefits of these factors outweigh the importance of a lower rate.
For example: The product with the lowest rate available may not offer the flexibility required for someone who potentially may need to move house in the middle of their term and port their mortgage.
Alternatively, the product with the lowest rate may come with high product arrangement fees which negate the long-term savings.
Key Takeaway
When considering which mortgage product is right for you, it is important to look at the overall picture and not just the headline rate. Working with a mortgage adviser can help you to understand the full picture and determine which product is best for your unique situation and long-term goals.
Your bank will always offer you the best mortgage rates because you’re already a customer
The Myth
It is easy to assume that your existing bank will reward your loyalty by offering the most competitive mortgage rates. Some people also believe that the process is simpler and cheaper because their existing bank already holds their financial history.
Unfortunately, however, this is seldom the case.
The Reality
While your bank may offer convenience, it is far from guaranteed to offer the most competitive rates or the product best suited to your needs.
The rates you receive will likely be the same rates offered to the public. As a result, the rates offered by your bank may not be as competitive as those offered by other banks or lenders.
Key Takeaway
It is important to consider the entire mortgage market to ensure that you are not missing out on:
- Lower rates elsewhere.
- Products with lower fees or better overall value.
- Features such as overpayment flexibility, portability or offset options.
- Lenders who specialise in your unique circumstances.
Working with a mortgage advisers will help you to assess all of the options available to you, helping you to find the most suitable option.
It’s better to stretch your budget as far as the lender will allow
The Myth
It is common for buyers to believe that if a lender is willing to offer them a certain amount, it is best to take the full figure to optimise buying power. This mindset is especially common when property prices are competitive and there is a temptation to push your budget as far as possible.
The Reality
A lender’s maximum loan offer is based on a series of affordability considerations and personal circumstances. It does not take into consideration your personal lifestyle choices, such as:
- Whether you plan to start or expand a family.
- Your savings goals and investment strategies.
- Your lifestyle choices, such as holidays, travel expenses or social life.
- Whether you’re planning a career change.
All of these are factors which impact what is truly affordable for you, and maximising your loan amount may limit the amount of disposable income you have to fund lifestyle changes and future plans.
Key Takeaway
Your mortgage should support the lifestyle you want, not compete against it. The maximum amount a lender is willing to loan should be considered a limit, not a recommendation.
Borrowing slightly less can help to provide long-term financial comfort and flexibility and take into account your future goals and aspirations.
You can’t get a mortgage if you’ve recently changed jobs
The Myth
Another common mortgage myth is that changing jobs makes it impossible to secure a mortgage. There is an assumption that lenders require several months-worth of payslips, long-term employment with the same employer and a lengthy track record in a single role in order to lend.
The Reality
The majority of lenders are far more flexible than buyers might expect. The reality is that many will accept applicants who have recently started a new role, have just finished their probationary period or who have signed a contract but are yet to start work.
Lenders understand that job or lifestyle changes, such as maternity leave, are a regular part of working life, and often reflect career progression, higher income and better opportunities.
Most lenders will require:
- A permanent or long-term contract.
- A confirmed employment start date.
- Proof on income (recent payslips or your employment contract).
Key takeaway
A recent job change is not a barrier to securing a mortgage. With the correct documentation, professional guidance and the right lender, borrowers can often proceed with their home purchase without the need to delay, even having just started a role.
Being on a zero-hours contract means you can’t get a mortgage
The Myth
There is a preconception that being on a zero-hours contract means lenders will be unwilling to approve mortgage applications due to irregular income. It is assumed that without guaranteed hours, you’re too risky for any lender to consider.
The Reality
While it is true that some lenders may be cautious about lending to those on zero-hours contracts, there are many lenders who are happy to proceed provided the applicant can provide evidence of a suitable income pattern.
Typically, lenders will look for:
- A steady track record of earnings over the preceding years.
- Affordability based on average income over a time period, rather than guaranteed hours.
- Evidence that you can comfortably meet monthly repayments, both now and in the future based on your earnings history.
There are several lenders who specialise in flexible income arrangements including zero-hours, freelance and contract work.
Key Takeaway
Being on a zero-hours contract is not an immediate black mark against your application. With clear evidence of income and the right lender, many borrowers can successfully secure a mortgage. However, the products available may be more limited.
If you’re rejected by one lender, all others will also reject you
The Myth
Many buyers believe that being declined by a single lender means that they will not be able to secure a mortgage from elsewhere. This is especially common amongst first-time buyers who assume that a single rejection will follow them from lender to lender as a black mark on their record.
The Reality
A rejection from a single lender does not mean that all hope is lost. Each lender has their own criteria for lending, affordability models and risk appetite. What one bank is cautious about, another may accept with little issue. Factors such as income type, credit history, deposit size and employment structure are all viewed differently from lender to lender.
For example:
- Some lenders are strict about credit scores, while others specialise in applicants with adverse credit history.
- Certain lenders prefer traditional employment, while other offer greater flexibility for the self-employed or part-time workers.
- One lender’s affordability model may lead them to decline an applicant, while another lender’s model may produce a different result.
By utilising a whole-of-market lender, such as Cooper Associates Mortgages, you can access a wide variety of lenders, maximising your chances of a successful application.
Key Takeaway
A decline from one lender is not the end of your mortgage journey. With differing criteria across the market, what one lender rejects another may happily accept. Reach out to a professional mortgage adviser who will be able to guide you through the entire process from start to finish.
