At this time of year it seems that every mortgage meeting I go to falls into one of three categories.
Clients that are looking for a new home, clients that are looking to change jobs and clients looking to use their bonus to overpay their mortgages. So this week’s blog gives some practical advice to all three types of clients.
If you are looking for a new home, the New Year is a great time to start as generally the housing stock on the market increases in January. The best advice I can give is to get your finances in place before you start looking for a property.
Getting an agreement in principle before looking around gives you an indication that you can obtain the finance that you need and it also allows the seller to determine that you are a credible buyer. Typically an agreement in principle can be obtained within a day once we have the right information from the client. You can generally look at borrowing around four and a half times joint income but most lenders work on affordability these days which includes looking at your outgoings.
A lot of clients ask about borrowing against their bonus. As a general rule most high street banks will lend against a percentage of bonus which ranges from 50% to 60% of a two year average. This is then added to the basic salary to obtain a total gross figure.
A change of employment doesn’t tend to be the issue that many clients think it will be. Most clients I speak to think the rules of the late 1990s apply, when you needed six months in a new job before applying for a mortgage. Things have moved on a great deal since then. These days most lenders are happy with the first month’s payslip and probation periods are not generally a problem for most of the lenders that we deal with. We have even recently had lending against job offers as long as the start date is agreed, is within three months and is signed by the future employer.
The key point to consider about changing jobs is that you cannot generally use bonus from a previous employment to support your income declaration. So if you are thinking of moving home and job at the same time, be aware, most high street lenders will not take the bonus element of your income into account no matter how consistent it is.
We do however have access to a large lender that offers bespoke underwriting and may lend against previous employment bonus as long as you have moved to a similar firm and role. Rates are typically about 0.20% higher than a high street rate but they look at a case on its merits and also lend on an interest only basis in some circumstances which works well with my clients who tend to receive annual bonus.
Using your bonus to overpay your mortgage
Overpaying a mortgage is an option for many clients come bonus time. As a rule if you are in a fixed rate then most lenders allow you to overpay by 10% of your outstanding mortgage balance per annum. The exceptions to this rule I am aware of are Metro Bank (20% of the balance outstanding) and Platform (£1,000 a month maximum). Tracker deals vary greatly from lender to lender so you need to check section ten of your mortgage illustration for more detail.
Overpaying can be a good use of the money. Not only does it reduce your mortgage payments instantly (assuming your lender operates daily interest method which nearly all lenders do these days) intrinsically it feels great to be closer to the end goal of being mortgage free.
Of course with my financial advisor hat on there are other, arguably better, uses of the money such as pension contributions or investments. The key is to speak to an expert and discuss the best way for you.
As a final note I have been amazed by the amount of clients and contacts telling me they read and enjoy my blog of late. If anyone has anything they would like me to blog about please get in touch. My specialist subjects are mortgages, financial services and Southend United 1979-present day.