How applying for a mortgage is like applying for a job

How applying for a mortgage is like applying for a job

These days, you don’t necessarily have to go to an interview to get a mortgage the way you usually do to get a job, but other than that the processes are, perhaps surprisingly, very similar.  In a recruitment scenario, the recruiter is essentially asking themselves three basic questions:
  • Can you do the job?
  • Will you do the job?
  • Will you fit in?
This is also what mortgage lenders want to know, so your mortgage application should aim to convince them that in your case the answer to all three questions is a solid yes.

Cover your basics, fill in the application the way you are asked

Employers have long used various tricks to work out which job seekers actually read adverts and follow instructions and which do not.  One of those tricks is to specify how an application is to be submitted.  In the old days it was often colour of ink (black not blue), these days it can be to include a particular word in your cover letter.  Mortgage lenders aren’t usually looking to weed out candidates who can’t follow instructions, but they are likely to be using computer systems to process part, if not all, of an application and hence they may specify how data is to be entered into each field.  If they do, make sure you follow the instructions.  Also, make sure that any data you enter does completely answer the question, otherwise the best you can hope for is that a potential lender requests further information.  They may, however, just decline you because you come across as unsuitable.

Can you do the job?

Remember that these days mortgage lenders are obliged to look beyond your headline income figures and think about your likely ability to repay a mortgage over the long term.  This means you want to do anything and everything you can to convince them that you will be able to bring in an income over the lifetime of your mortgage.  For example, if you had plans to upskill yourself and/or to start a side hustle with a view to bringing in extra money (at some point if not immediately), then it would be a great idea to set the ball rolling before you even applied for your mortgage.

Will you do the job?

A mortgage lender is going to look for evidence of how well (or badly) you have managed your money in the past, which means that they’re going to take a close look at your credit record.  Do everything you can to make this look impressive.  If you’ve had a chequered financial history, time may be your friend.  Negative markers such as late payments drop off after a certain time.  If you know you have them, you might want to check when that time is and see if you can hold off applying for a mortgage until after it is past.  Once it is past, make sure it is removed correctly.  Even if you have a perfect financial history, it’s still a good idea to check your credit record for mistakes (they happen) or to see if you can make any small touch-ups which could help you (like making sure you’re on the electoral register).

Will you fit in?

Does your application fall within the lender’s “comfort zone”?  In blunt terms, a lender needs to think about how easy it would be to recoup their money in the event of a foreclosure.  Standard, residential properties in popular locations tend to be relatively easy to sell on.  Niche properties and properties in more out-of-the-way locations can be rather more of a challenge to sell.  Similarly, buyers actually living in the properties, or at least in the UK, are easy to trace, whereas expat buyers may be perceived as rather more of a risk.   Your property may be repossessed if you do not keep up repayments on your mortgage.  
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The truth about the landlord loophole

The truth about the landlord loophole

It’s probably fair to say that the government is not exactly popular with property investors at this point in time.  While it’s understandable that they may wish to prioritise residential buyers in general (and first-time buyers in particular), the ideal way to do this is to work to smooth the path to property ownership (and indeed moving home) rather than to keep creating obstacles for landlords, especially when the UK has such high demand for rental property.  Be that as it may, change is a constant in life and people just have to deal with it.  One way some property investors have opted to deal with the current round of changes is to move their property portfolio from a private holding to an asset held by a limited company.  This move has been widely publicised as the “landlord loophole”, but, as is often the case, the situation is rather more complex than some media articles make it appear.

It is illegal to try to use a limited company structure purely to avoid tax

Please take careful note of that previous sentence.  If you move your property portfolio into a limited company purely to avoid tax you will be breaking the law and if you are caught (which is entirely possible, if not highly probable), then the best result you can hope for is that you wind up paying HMRC the tax you would have been due in the first place, plus you will have to write off the (far from inconsiderable costs) of setting up a limited company.  A worst-case scenario is that you spend a lot of money on lawyers only to end up being convicted of tax fraud, an offence which can land you in prison (albeit typically only in the very worst cases).

Using a limited company structure the wrong way can see landlords paying more tax

Private individuals pay income tax on all income, including any rental income from property held in their own name.  Limited companies pay corporation tax on all profits generated by the company.  When company profits are handed over to third parties, they become subject to some form of taxation, the exact form of which will depend on the way in which the money is disbursed.  The likeliest options are dividend tax and income tax.  If your income from other sources is minimal, and you depend on the income from your rental property to pay your bills then switching to a limited-company structure could be an expensive mistake as the double-taxation effect might lead to higher tax bills, if not now than in the future.  By contrast, if you are a higher earner and are currently in a position where you can afford to live without the rental income from your property portfolio, then switching to a limited-company structure may reduce the level of tax you pay.  In short, if the profits from a company are held within a company, they will only be subject to corporation tax, which is likely to be much less than the income tax higher earners would have paid.  Then if/when your income drops (e.g. you retire), you can start to withdraw income in a controlled (and tax-sensitive manner).

Limited companies can be useful for estate planning

On the subject of retirement, limited companies can be useful from the point of view of estate planning especially for property investors, since they provide a convenient way to apportion the benefits of your estate.  For example, if you currently own two properties and bequeath one to each of your children, circumstances may conspire to deal one of them a much better hand than the other, whereas if both properties are held in a limited company which is bequeathed to your children in equal shares, then they benefit from it equally.   Your property may be repossessed if you do not keep up repayments on your mortgage. The FCA does not regulate some forms of estate planning. For these services we act as introducer only.
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The UK’s best lender is the bank of mum and dad

The UK’s best lender is the bank of mum and dad

While the Bank of Mum and Dad must be one of the financial media’s favourite clichés, like many cliché’s it’s grounded in truth.  Even with a university education leading to a professional job, today’s generation of young people can struggle to save the hefty deposits needed in the modern housing market while also paying rent.  Unofficial “bridging loans” (or straightforward advances on their inheritance) can go a long way towards helping young adults to get the keys to their first home.  If you’re a parent contemplating assisting your child with a housing purchase, here are some points to consider.

Do your sums thoroughly before you speak to your child

Look after yourself first.  It isn’t selfishness, it’s self-care, which is very different.  If you wind up giving your child a sum of money which will (or could) leave you financially stretched (even if the child agrees to pay it back), then you risk laying the ground for all kinds of problems from the entirely practical to the emotional.  Do your sums thoroughly, so that you only offer money you are sure you can live without, not just in a best-case scenario but also in a worst-case scenario.

Set expectations clearly right from the start

In addition to deciding how much you can afford to give your child, you also need to decide whether the money is a gift or a loan and if the latter on what terms it will be given.  This may seem like a harsh comment, but loans between family members can be fraught with pitfalls even if they’re documented in such a way as to make them legally-binding contracts.  Let’s be honest, as a parent if your child fails to pay back a loan as agreed, are you really going to take legal action against them?  What if they experience a negative life event (sadly it can and does happen) and genuinely can’t pay it back, at least not in the time agreed, perhaps not ever?  On that point, if you do decide to advance money in the form of a loan, it is a very good idea to document this formally, rather than just “taking it on trust”.  That way, if your child does run into financial difficulties, you will have a claim on their funds in the same way as any other creditor (and it is entirely up to you what you do with any funds you are given from their assets, you can give it straight back to them if  you wish), whereas an undocumented loan is very likely to be ignored in any insolvency process.

Think about how your actions will impact other people

In principle, you can, of course, do whatever you like with your own money.  In practice, however, other people will have an opinion on your actions and sometimes this is entirely understandable.  In particular, if you have more than one child, being fair to each of them can be more complex than it sounds.  From a purely mathematical perspective, you could just give (or loan) the same amount of money to each on the same terms (although if you were going for real mathematical precision, the money would have to be given at the same time to negate the effect of changes to interest rates and inflation).  Life, however, is about more than mathematics, for example, if one child went to a traditional university and received financial support from you during their studies, while the other undertook an apprenticeship and paid their own way, would it really be fair to give them both the same amount of help towards a deposit on a property?  That’s a question only you can answer, but it’s definitely worth consideration. The FCA does not regulate some forms of bridging loans. Your property may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.  
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The key points of buy-to-let finance

The key points of buy-to-let finance

Even though the government seems to have been subjecting buy-to-let property investors to a non-stop barrage of financial attacks, the fact still remains that the laws of supply and demand still favour property investors.  At this point in time, however, it is no longer possible for investors simply to blunder into property blind and wait for a rising tide to do its work.  Now property investors really have to be careful to buy the right properties, in the right locations at the right prices and to be completely sure that their numbers add up.  With this in mind, here is a quick guide to the key points of buy-to-let finance.

Mortgage Tax Relief is coming to an end

This fiscal year is the last year in which Mortgage Tax Relief will exist at all and only in a very reduced form.  The announcement that Mortgage Tax Relief was to be abolished was widely reported in the financial press, as was the fact that the change meant that some landlords might be better off switching to a limited company structure.  This is a complex topic and might be worth discussing with a financial professional.  The more simple point to remember is that you will need to factor this change into your financial calculations, especially since you are no longer permitted to charge “add-on” fees to your tenants.

A ban on “add-on” fees

Picking up on the previous point, as of June this year it will cease to be permitted to charge tenants any extra fees over and above their rent.  This is entirely separate to the ban on letting agents charging fees to tenants.  In principle, this should not actually make any difference to a landlord’s finances because it will simply mean that instead of fees being charged at the time the service is rendered (or shortly thereafter), they will be factored into the level of rent charged, however this does put the onus on the landlord to have a totally clear view of everything which they will need to charge to the tenant rather than only thinking about it when the job needs to be done and billed.

The removal of the “wear-and-tear” allowance

This is another change which really is probably more about administration than finance, the old 10% “wear-and-tear” allowance is no more and now landlords have to itemise each deductible item.  In short, if you have never been in the habit of holding onto receipts for maintenance and upgrades to property, then you need to start developing it.

Stamp duty tips against investors and towards first-time buyers

The 3% surcharge on second or subsequent properties, has been a fact of life for some time now, however, the decision to relieve first-time buyers of the need to pay stamp duty is rather more recent.  In principle, improving affordability for first-time buyers as compared to other buyers (especially investors) could make it more difficult for investors to secure quality property, but, then again, the fact that buy-to-let landlords will simply pass on their expenses to their tenants may counterbalance this.

The issue of affordability

Anyone interested in starting a buy-to-let portfolio (or expanding an existing one), should be aware that mortgage lenders are now obligated to undertake affordability checks on “portfolio landlords” currently defined as a landlord with four or more distinct mortgaged Buy to Let UK rental properties (or seven or more for remortgage applications without capital raising).  This definition could, of course, be updated and/or the requirement for affordability checks extended to all landlords seeking mortgages.

Regulatory issues

As a final point, letting residential property is now a highly regulated activity and regulations can and do change so landlords must keep appraised of them otherwise they risk financial penalties, even if their only offence was an administrative error with no real-world impact.   Your property may be repossessed if you do not keep up repayments on your mortgage. The FCA does not regulate some forms of buy to let mortgages.
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Moving Down In The world

Moving Down In The world

Family homes are great for families, but once children fly the nest, they can suddenly become a whole lot bigger than one or two people need, or want, on their own, and for all the happy memories they have helped to create, it’s often the right decision for people to move onwards and downwards, into a cosier home, which requires less cleaning and maintenance.  Downsizing can seem like an intimidating task, especially if it’s been a while since you last moved, but there are many advantages to it, such as releasing equity in your current home, allowing you to move somewhere better suited to the final stages of the ageing process and, last but by no means least, allowing you to clear out your physical possessions at your own pace.  If you’re one of the many people who are thinking about downsizing, here are some tips to get you started.

Persuade children/grandchildren/other people to clear out any remaining belongings

If you’ve been living in the same house for an extended period, while the young adults (or other people in your life) have been moving around, then your home may have become an unofficial storage unit.  Start your downsizing journey by speaking tactfully to the relevant people and, where possible, encourage them to move their stuff from your home.  If they’re really not in a position to take back their belongings and you still want to help them, then you may want to add helping them with a storage solution to your list of downsizing tasks.

Downsize your possessions working from the every day to the sentimental

There are varying approaches to downsizing and you might want (or need) to try out a few before you find the one which works for you.  Two common approaches are to start by item and to start by area (or you could try starting with specific items in a specific area).  Whatever approach you choose, you may find it easiest to start with items which are purely functional before working your way towards items to which you have a sentimental attachment.  When you do come to sentimental items, remember that the extent to which you purge is entirely up to you, so if you have a genuine emotional attachment to something, then it’s perfectly reasonable to keep it, however, you might also want to consider the option of taking a picture of it and moving it on to a new home to make someone else happy.

Photograph your home (and garden) in “sale-worthy” condition

Whatever your future plans, it makes sense to achieve as a high a price as possible on your current property, even if you don’t need it now, it may be helpful for later in retirement or you could give it to someone else (or your favourite charity).  A standard part of the sales process is to put your existing home into the best, possible condition, such as by undertaking any outstanding maintenance tasks (indoor and outdoors), refreshing the decoration and decluttering.  This could be a great opportunity for you to photograph your home looking its absolute best and you could even get your photos bound into a photobook as a lovely souvenir of your family home.  The photos you take are likely to be very different from sales photos, which are created to show off the house in a way which allows a potential buyer to visualise themselves living in it.  These photos are a hugely important part of the sales process and if you choose to sell your home yourself, you may wish to organise a professional photographer to take them for you.  That said, you may find that opting for a traditional estate agent offers a higher level of convenience and can be more economical than you might expect.   Your property may be repossessed if you do not keep up repayments on your mortgage.  
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Maximising your chances of being approved for a mortgage

Maximising your chances of being approved for a mortgage

If you are buying your first home or moving to a bigger one, then there’s a very good chance that you’re going to need a mortgage to help you to do so.  The bad news is that being approved for a mortgage is very far from a formality.  The good news is that it is possible, as evidenced by the many people who successfully do so each year.  With that in mind, here are some tips on maximising your chances of mortgage approval.

Build a deposit

There are two good reasons why mortgage lenders prefer borrowers with larger deposits.  The first reason is the straightforward fact that larger deposit lowers the lender’s exposure to fluctuations in the property market.  In principle, the borrower is responsible for the mortgage, but, in practice, if the worst comes to the worst and the borrower goes bankrupt, it will be the lender who is left on the hook.  The second reason is that the ability to raise a large deposit shows that the borrower can save (or has access to financial support from other sources).

Make sure your credit record looks as good as it possibly can

In addition to checking for any clear errors (and getting them corrected), see if you can go a step further (or several steps further) and actively improve it.  Sometimes even simple changes can make a difference (possibly only a small difference, but every improvement is a gain).  For example, if you’re not on the electoral roll, then get your name added (and if you are on, make sure you’re listed at the address you’ll be giving to your mortgage lender) and if possible, add a landline phone number.  On a larger scale (and with potentially more impact), make the time to pay off any small-scale debts you are carrying, such as credit cards you hardly use, and then actually close them (rather than leaving them in limbo).  In fact, if you still have any credit cards with zero balances, then ask yourself if you really have a compelling reason for keeping them open and if the honest answer is “no” then close them.  If you need any more encouragement to take this step, then remember that every financial product you own is a potential point of compromise and so minimising the number of companies which have access to your financial details should also reduce the likelihood of you becoming a victim of fraud and/or identity theft. NB: remember that the UK has three main credit-reporting services Experian, Equifax and CallCredit and you will need to check your record with each of them to get a full picture of how your financial history will look to a lender.

Keep your finances on a steady track

Remember that your credit record is only the first check a lender will make.  If you pass this hurdle, they will want to take a more detailed look at your spending by means of your bank statements.  With this in mind, you want your statements to give the impression of a person who lives their life in a way which is unlikely to give a potential lender a moment’s cause for concern.  So, for example, unless you are really desperate to leave a job you hate, wait until your mortgage is 100% secured before doing so and if your plan is to start your own business, then hold off making any purchases which make this obvious to the lender.  In other words, while you have to answer any questions truthfully, you only have to answer what they actually ask.  Always remember, however, that the onus will be on you to keep up with your mortgage payments and that the consequence for not doing so can be losing your home, so resist any temptation to over-stretch yourself from the start. Your property may be repossessed if you do not keep up repayments on your mortgage. On clicking the above link, you will leave the regulated site of Coombes & Wright Mortgage Solutions Limited. Neither Coombes & Wright Mortgage Solutions Limited, nor Sesame Ltd, is responsible for the accuracy of the information contained within the linked site.
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