How to best prepare for a mortgage application

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DP and I plan to buy our first property next year and I’m keen to find out what we can be doing in the meantime to make our application as smooth as possible.

We have no kids, both work full time, DP is self-employed and I am the higher earner.

We plan to have a deposit of 10% which we’ve been saving for a couple of years and we also both have some of this money in Lifetime ISA’s. At the moment we both have about £1k on credit cards which will be paid by the end of the year.

Our other monthly payments currently are -
Rent - £900
Water/gas/electric/council tax - £250
Car payment - £140
Car insurance - £60
Netflix - £10
Phones - £80

We’re both saving roughly £800 a month at the moment so no wild crazy spending apart from a couple of dinners out etc. Is there anything we can do in the run up to applying for a mortgage to make sure we’re in the strongest position possible? I know that DP being self employed isn’t ideal and he also got the Covid government grant which apparently some lenders are declining people for at the moment. I’d love any hints or tricks!

Make sure his accounts are up to date and in order, especially bank statements as they will probably want to see 6 months worth of business account ones. Pay off credit card but then still use each month and clear balance each month.

Yes all accounts are in order, he’s had the same accountant for the last 5 years and is meticulous at keeping records.

What do you mean by business account? He has his current account where everything goes in and comes out of but that includes work and personal spends. Would you advise opening another one purely for personal use?

Make sure there's no gambling on your bank statements within 6 months of the application - even small amounts!

Maybe slightly unorthodox to mix your business and private accounts - I guess there’s only a very small number of transactions.
He will need to provide the last 2-3 years‘ self assessment tax calculations and overviews (SA302) which his accountant should be able to provide.

Don't run a balance on a credit card if you can afford to save, ever.

Pay them off straight away so you don't pay any interest, which is charged at a far higher rate than what you get on savings, but then keep using the credit cards for some of your normal spending, eg groceries, petrol and then set up a direct debit to pay the balance off in full every month because this shows you can manage credit properly. Make sure you both do this with credit cards in your own names.

Monitor your accounts carefully so no payments are ever missed.
Don't use your overdraft at all even if you have a free buffer. Makes no sense but banks see this as a negative.

Check where you are with affordability vs your expected mortgage size. If you're not pushing income multiple limits and have a good deposit, you should easily get accepted but keep an eye on interest rates and what is available for FTBs because smaller deposit mortgages are charged at a much higher interest rate than if you have a 15/20% deposit.

If you want to spend a bit less you might be able to cut down your grocery spend, trim Netflix a little - if there's only two of you, you don't need the top package as you can't watch more than 2 screens at once and the quality of the middle version is more than satisfactory. Also your phones look expensive so if your contract ends, keep your existing phone and get a sim only for the service to cut it down to £5-10 pm each.

I would guess he is a sole trader and so doesn't need to have a separate business bank account. I operate as a limited company and so my company money and my personal money is strictly separated.

I'm reapplying for a mortgage in a couple of months and will be making sure there's no balance on my credit cards - I pay them off in full every month, which the bank could see, but as they had a balance on them at the time of the application they were treated as debt. I'll be paying them off daily and avoiding my Halifax card, which is great for overseas transactions but you can't pay it off early so it takes weeks to bring the balance back to zero again.

I agree with Barbara, your phone contracts look expensive. I pay £35/month for three SIM-only contracts for me, DH and DS. I'm assuming you're buying the handsets through the contract - have a look at MoneySavingExpert for why you should avoid that if you can.

You're running a car but it looks as if you're not factoring in other costs such as road tax, car repairs and servicing, MOT, fuel. Likewise you don't list contents insurance, is that because you don't pay it monthly?

Yes you’re all right about the credit cards, I think because we pay a set amount each month I’d just stopped thinking about them but of course they’re still incurring interest. Next month we’ll just pay them off and have a month of not adding to our savings.

Yes DP is a sole trader and previously has been very bad with managing his finances. Because he has always been making more than he spends he just never looked at his bank account and so all the money he has in the world was sat in his current account until a few months ago He now has a LISA, a savings account, an account to put money for tax and NI aside and then a Starling account which is solely for personal use. Now all that should be going in and out of his current account is earnings and work related costs.

Our phones are quite expensive and definitely an area where we need to cut back. Once these contracts are up in a couple of months I’ll definitely be switching to sim only to bring them right down

Save more. A 10% deposit isn't likely to be enough. Larger deposit will also mean your mortgage rate is likely to be lower.

Keep saving - 95% and 90% mortgages were withdrawn in March so you’re going to need an 15% deposit as things stand.

If you're not already, get yourselves on the electoral roll at your current address.

With credit cards, I'm onto my 3rd property and have always had a balance on a couple of cards when applying for mortgages and never had a problem.

But, I had a 30% deposit - so definitely look to up your deposit amount, you get better rates the lower your LTV.

One of our friends has just bought a £500k house with a 10% deposit so there’s definitely still options but I appreciate there are less lenders willing to. Plus we probably won’t be buying until the middle of next year when I expect things will have changed once again

Don't underestimate the significance of the Covid self employed grant application. Some lenders view that as a business that has struggled and will only lend on 80% of the overall income.
Make sure you are on the electoral register.
Don't worry about the credit cards unless you are paying interest on them,in which case, why are you saving £800 a month but not clearing them?!
You're definitely going to be better off with a 15% deposit, mortgages are not going to become any easier to apply for.
Your car finance payment will be taken into consideration with how much you can borrow.
Your dp will need at least two if not three years of accounts for his business. If he does his own tax return he can print off the calculations himself online. Otherwise he'll need an accounts certificate, certified by a qualified accountant.