If you’re a first-time buyer you might not be sure how big a mortgage you will be allowed.
Does the old rule of thumb about borrowing 3.5 times your salary still work? And does the size of your deposit make a difference?
Mortgage lenders actually have pretty complex calculations when it comes to working out how much they’ll let you borrow. However, it’s still a good idea to have a rough guide of how much you’ll be able to borrow before you start house hunting. After all, there’s no point failing in love with your ideal home only to discover that it’s £20,000 out of your price range. Let’s take a look at how you can make sure your mortgage dreams can become a reality.
Since the Mortgage Market Review (MMR) in April 2014, mortgage lenders must now make extra checks to ensure that they people they lend money to really can afford to repay it. Rather than just ask you about your income they will ask you for details of where your money goes each month and will want to back that up with copies of your bank statements. Lenders are trying to calculate how much you can afford to borrow, not just at current interest rates, but also if they go up. This means the old income multiple rules just don’t work anymore.
Your lender or mortgage broker will interview you face-to-face or on the phone and they’ll want to know all about your monthly spending commitments. From how much you spend on your weekly grocery shop, childcare, holidays and gym membership to your credit card repayments and takeaway budget, they’ll go through everything to get a complete picture of how much you can afford.
The lender or broker can then give you a decision of how much they’re prepared to lend you. However, the amount you’ll have to pay each month towards your mortgage will depend on a few other things, including your credit history, the size of your deposit and the term of the mortgage. Putting down a 40% deposit can help to secure the best mortgage rates but if you won’t be able to get together this much – like most buyers – you should aim for at least a 5% or 10% deposit.
Estimating the mortgage amount
You can get a rough guide to how much you’re likely to be able to borrow by using a mortgage calculator like this one from the Money Advice Service – this will be enough to help you get a feel for whether you can afford to buy at all (and the type of budget you’ll have). For a more detailed figure if you speak to a lender or broker they will be able to give you an Agreement in Principle (AIP). This is where they do a brief assessment of your finances and tell you how much you’ll be able to borrow, but without having the full mortgage interview. It’s not binding though – the broker or lender can change its mind after they’ve found out more about your spending habits.
Using a mortgage broker like Ocean is worth considering, as it means you’ll be able to get access to a wide range of mortgage deals, not just ones available from a specific lender. Mortgage brokers can also get access to mortgage deals that aren’t available on the high street.
Looking to get a mortgage? Find out everything you should consider with our guide >
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