So you’ve been saving obsessively for the past year and a half, or perhaps have just had a windfall, and now is the time to finally buy your first home. You know which area you want to live in, you know what you want from your new home and you know how much you have to put down – but what about the bank? You make the appointment with one question on your mind: How much can I borrow?
The advisor drones on about responsible lending, about Mortgage protection, asks about your credit cards and lots of other dull things you endure to get you that all important figure that will allow you to finally go shopping! You return triumphant a few weeks or months later with an offer accepted on a stunning home you have fallen in love with and then the reality of the mortgage meat grinder really hits home. You are missing a payslip, your bank Account shows a recent expensive weekend away and your latest accounts haven’t been finalised yet, but that won’t be an issue. Right?
As a broker, I have to always balance efficiency with responsibility. You probably don’t want to spend five hours with me in our first meeting explaining every aspect of your life, nor do you want to hear me going on about affordability, credit scoring, life assurance and all the other things that go into buying a house. You want me to handle all that for you and broach these things when they are relevant, right? I also have to ensure that you don’t take on something risky, that you understand the associated risks of the choices you are making and that you can comfortably afford what you plan, including all your bills in addition to the mortgage payment. I also need to be able to demonstrate you are who you say you are, that you really did save that money or that it really was a gift.
So how do we prevent disappointment down the line and ensure the advice brokers like myself provide is as accurate possible? Ideally we would like to see every document involved in the transaction in that first meeting. These can include payslips, P60, accounts, SA302’s business bank statements, personal bank statements, bills, savings statements, working Tax Credit Letter, child tax credit letter, child benefit letter and bank statements. Invariably, clients don’t always have access to these documents right away and often they want to get straight out looking for houses. Surely, they can tell you what they earn, and what they spend and can get you those documents later on down the line?
There are a few things you could consider when you begin planning for your first home that will ensure you are in good shape when it comes to applying for mortgages in the future. Firstly, if you are a self-employed sole trader or partnership, you will want to get your last three years SA302s. You’re probably thinking: SA-whats? Let me explain: When you or your accountant submit your accounts each year to the HMRC, you get a summary of the information you have provided to them. An SA302 is pretty much an exact copy of this, produced by the HMRC. It’s essentially a receipt of your tax return and quotes the amount of income from employment, self-employment, income from land and property and income from savings interest. It will also clarify your tax-free allowance and how much tax is due. But the number a mortgage broker would be interested in is the combined income that tax will be charged against. If you go to an accountant, you will probably get a set of accounts with profit and loss and a few other summaries on. Many lenders will accept these documents but, with many other caveats, such as insisting that they are produced by a chartered accountant with certain qualifications, if your accountant is not chartered or does not have the right initials after their name, your books are useless in the eyes of the lender.
Also, your net profit on your profit and loss report may be different to the net profit you report to HMRC due to capital expenditure. That £4,000 piece of machinery you bought from the business gets deducted from your net profit after this has been generated by the P&L report and may be detailed on another page of the accounts. Some mortgage underwriters are aware of this and will find it. Others won’t be and it might slip through. Another consideration is that underwriters may spot things that concern them on your accounts. What if your revenue was higher last year than this year, but made less profit that this year? If there is an anomaly they will want it explained and this might cause more delays. The benefit of the SA302 is that there can be no doubts about income; it’s one simple figure in black and white that no one can dispute. You can order SA302s for the past three years from HMRC by post, or within an hour if you know the right tricks! Get them now and you can put a tick in this box straight away.
If you are employed, thing are a little more straightforward, especially if you are on a fixed salary with little to non-dependency on bonuses. You would just need your P60 and latest payslip; the chances are you know that gross figure off the top of your head. It’s if you rely on commission, bonuses or work shifts where things can get trickier. Some lenders will only take regular commission into account if you can evidence it over a year or six months, yet some others will take an average of the commission evidenced over the last three months. Personally, I recommend excluding any of this income that can vary, like bonuses. For instance, your business may go through a slow patch and any extra income can disappear quickly. In this case, it would not be responsible to lend as you may be left locked into something unsustainable.
If you work shifts then, again, averages are the norm. So, it’s well worth looking to collect up to 15 weekly payslips (3 months’ worth) to ensure that averages will cover the full shift rotation and paint a true picture. If bonuses are to be included then it’s likely that the amount on your P60 must exceed the total amount we would be submitting. If you have only just started doing overtime, lenders will not see this a long-term commitment and will want to ignore it. Payslips need to show the name of the company, the name of the client, national insurance numbers, gross income, tax and national insurance and any other pre/post tax deductions as well as the net income figure. Handwritten payslips almost certainly won’t be acceptable.
As you probably have seen, benefits and child tax credits have been in the news regularly of late. It used to be quite common for families to receive about a third of their total income from a variety of benefits. Lately, this has been significantly curtailed, but the income received can still be used in a mortgage application and, in many cases, can be crucial. The way these benefits are worked out can be difficult. This is because they base the current year’s pay out on last year’s earnings.
Let’s imagine you were unemployed last year, but have recently found a job. You are currently receiving a high level of working tax and child tax credits from the DWP and, along with your new income, can justify a good loan amount. When it comes to making your mortgage application, however, the paperwork shows the DWP figure based on you earning nothing, whereas now you have an income. In this circumstance, it’s likely that the lender will simply ignore the income from DWP and your loan amount may drop drastically. If you are in a similar situation, the best thing to do would be to update the DWP as soon as anything changes. Whilst it could mean that you receive fewer benefits, at least you can use the amount you do get as part of the application. Also bear in mind that getting the paperwork from the DWP might take several weeks.
It’s true that lenders now want to know exactly what customers are spending, and will factor lifestyle costs into an application. In many cases, lenders will want to see three months of personal and bills accounts to judge how accurate the client was in detailing their spending. Personally, I have never seen a perfect set of bank accounts. Sometimes we buy things on debit cards, sometimes we use cash and other times we put them on a credit card. We all spend our money in different ways – sometimes responsibly and other times not so much. One way that can make this easier is to separate spending between bill accounts and spending accounts. If you know you have £1000 of direct debits going out through the month, set them all up on one account and feed £1100 in every month (£100 to allow for fluctuations). This way, you can ensure that the account always maintains a healthy balance, and there are always funds available for direct debits without relying on overdrafts.
Lenders know your mortgage payment is likely to become your biggest direct debit and can take some planning. If your mobile phone bill bounces occasionally at £30 a month, it may be apt to consider if your mortgage direct debit might occasionally bounce too. We want to paint a picture of responsible customers, living well within their means, who have been completely transparent about their spending. By separating the bills, they can be clearly read and checked against the application form and, by budgeting, we ensure the conduct of the account looks excellent.
With regards spending accounts, your disposable income is of course yours to spend however you want. Generally, you shouldn’t need to worry about how your disposable income is spent once your bills are taken care of as long as there are no signs of financial stress – such as payday loans – there are no signs of gambling, or very large cash withdrawals that seem out of character. If the account is within its overdraft, then at most it should be a fraction of the amount credited to the account to avoid looking like you ‘live in your overdraft’. The issuing bank may one day decide this is unsustainable and reduce that overdraft by a significant amount (most want to see it gone within 6-12 months).
There is absolutely no harm in speaking to a broker six months before you intend to buy. Checking out these things beforehand can ensure that you have plenty of time to get the issues rectified and give yourself the best possible chance of getting on the housing ladder.
You can contact one of our brokers anytime on 0207 183 1101
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