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Mortgages – how much can I borrow?
If there’s one question you’re asking yourself when it comes to applying for a mortgage, it’s probably how much you can borrow.
The thing is, though, it’s not simply a case of how much you can borrow, but also how much you can afford to borrow. In this blog, we will look at how much you may be able to borrow when you apply for a mortgage – and how much you should borrow.
One of the main things that will guide your decision on how much to borrow is the price of the property you want to buy. If you have an area you’re thinking of moving to, you can get an estimate of its average house prices here.
The bigger your deposit, the more you should be able to borrow and the better the interest rates you’ll be offered. Ideally, you should aim to save up the equivalent of more than 10% of the value of the property you plan to buy.
If you’re a homeowner and are selling your current property, subtract your outstanding mortgage balance from the money you expect to get from the sale, and what’s left can be used as a deposit on your new house (as well as to cover stamp duty and other moving costs).
Once you have an idea of the price of the house you want and the size of your deposit, you can work out more accurately how much you’ll be able to borrow.
Do your sums
One of the best ways of working out how much you can borrow with a mortgage is to use a mortgage calculator – Ocean has one you can try.
Enter the amount you’re thinking of borrowing (based on the research you’ve already done), the term (how long you’ll be making payments for) and the APR, and the calculator will work out how much you’ll need to pay each month.
This is important, because if the estimated monthly payment the calculator provides is more than you can realistically afford to pay, it’s worth having a rethink. If you’re stretched too thin, you may struggle to afford your mortgage repayments on top of your other outgoings.
Not only this, but if the lender you actually apply to for a mortgage thinks you’ll struggle with your repayments, they’re likely to turn down your application.
As we said, applying for a mortgage is not just about how much you can borrow but also how much you should borrow. If you know you’ll be overstretched borrowing the sum you’re thinking of applying for, have a rethink.
As well as looking at your income and outgoings to work out how much you can afford to borrow, a mortgage lender will look at how well you’ve borrowed in the past. They do this by taking a look at your credit history.
Your credit history is a record of all the credit agreements you’ve made going back over the last six years. It details how much credit you have available to you at the moment, whether you’ve missed any repayments in the past and whether you’ve ever entered into a formal debt solution – among other things.
If a lender sees that you’ve struggled with borrowing before, they may not offer to lend you the amount you want. Alternatively, they might offer you a higher rate of interest than the one quoted, or they might simply turn your application down.
Even if you have never borrowed, your credit history could work against you when you apply for a mortgage. As we said, lenders look to your credit history to see how well you manage credit, and if you’ve never borrowed there will be no record to base their decision on.
If you have no credit history – or a very limited history of borrowing – this can have an impact on how much you’ll be able to borrow, and a lender may offer you a smaller mortgage than you’d hoped for. If this is the case, it might be worth putting your house hunt on hold for a while to save up a larger deposit and build your credit history.
Why doing your research is important
Just why is it so important to work out how much you can borrow with your mortgage before you apply for one? Well, each application for credit you make leaves a mark – known as a footprint – on your credit history that lenders can see, and they can also see if your application has been turned down.
If you make several applications for credit close together, it can make you look as though you’re desperate to borrow, and this can stand against you. By working out how much you can realistically afford to borrow, there may be a greater chance your application will be accepted.