A mortgage is a loan used for the purchase of a property and is provided by a bank or mortgage lender. A cash deposit is initially required (usually a minimum of 5% of the property price). Following this, the mortgage including interest is paid in monthly instalments over an agreed number of years.
How much can I borrow for a mortgage?
Every mortgage lender will conduct their own mortgage affordability checks when reviewing mortgage applications. Each lender will have their own criteria so some factors may differ.
For example, if you are fully employed and receive a basic salary then this is classed as guaranteed income. Therefore, a lender would take 100% of this as an income source. These would be taken into account for any mortgage earnings ratio equation and affordability.
Banks decide how much you can borrow . . .
When applying for a mortgage, the amount of money you will be allowed to borrow will be capped at a multiple of your total household income.
Generally, most lenders will allow you to borrow up to four and a half times your annual income. For example, if you are purchasing a home with your partner and you both earn £30,000 each then with the combined income of £60,000 you may be able to borrow upto £270,000. This will be subject to the lender’s affordability criteria.
Can I borrow more?
If you meet certain criteria, then some banks will allow a limited number of mortgage applicants to borrow five or even five and half times their income. However, this is dependent on your earnings and the loan-to-value you will be borrowing at. Halifax will allow couples earning a combined income of £50,000 – £75,000 to borrow five times their income at 75% LTV.
In addition to this, your career could also affect your borrowing power. Some banks offer ‘professional mortgages’ to individuals working in certain industries. These professions include doctors, solicitors, engineers and actuaries.
A mortgage deposit is a percentage of money paid to purchase a house. This forms the equity you own in the property with the remaining amount bought using a mortgage. Most mortgage lenders have their minimum deposit requirements and the lowest you are likely to find is 5%. Subsequently, this would mean the largest mortgage you could get are 95% mortgages.
The amount of deposit required for your mortgage is calculated as a percentage of the value of the house you are purchasing. After this is calculated, the remaining amount will form as your mortgage. This will be the amount you are borrowing.
Most mortgage providers will prefer the deposit to come from your own savings. This will demonstrate your practicality with money. Gifted deposits from family members are also accepted. It is important to note that the deposit will have to be paid during the exchange of contracts, this is generally a few weeks before completion.
Mortgage affordability is in relation to how much an individual can borrow. It can be calculated by comparing your income against your outgoings. This will reveal the amount of surplus funds you have remaining for your mortgage repayments.
If you have a large amount of debt, then this will mean you will be able to afford less as mortgage lenders need to factor in your monthly debt repayments into the affordability calculation. The mortgage affordability test checks will be based on a multiplier of your annual gross income. Typically most lenders will calculate this by working on a 4-4.5 multiplier.
The multiplier will be greatly influenced by your credit worthiness. Not only will the income be taken into account but also your age, deposit amount, credit history and your daily living costs. Once your net disposable income has been calculated, the impact of monthly mortgage payments can be ascertained.
There are criteria set for mortgage affordability – you will be mainly assessed on two factors of your income. This will be your annual income along with your outgoings and expenses. The reason for this being an accurate representation of your financial position will be determined.
Additionally, you will be required to produce documents that prove your affordability. These will be:
Moreover, credit checks will be carried out. The lender will conduct a hard credit check which will leave a footprint on your record. By assessing this the lender will be provided with your credit history and borrowing which will determine if you are a worthy credit prospect.
You must ensure that you will pass the credit check as a hard search can leave a significant footprint on your credit score and can bring it down. In addition to this, you may also find it harder to apply for financing or loans as a lower credit score makes it harder to get approved.
What is a mortgage offer and how long does it last?
A mortgage offer is a formal document which is issued by the mortgage lender to the borrower confirming they are satisfied to lend the agreed borrowing amount. This is also a binding contract between the lender and the borrower.
The mortgage offer is usually issued once the lender has assessed your financial circumstances and a full application has been made along with a valuation of the property being conducted.
This will mean that you as the borrower possess the desired income level and are also capable of meeting the agreed mortgage repayments. Typically, this offer will last 3-6 months from the date it is issued and will vary from each lender.
If you experience unexpected delays which will take you longer to complete on your purchase, then it is important you contact your lender as soon as possible. Depending on your lender and the cause of the delay, you may be able to get an offer extension. There may be additional fees payable.
If the lender is not willing to extend your expired offer, then you will need to reapply for your mortgage. This may involve a second valuation and additional solicitor fees.
Applying for a mortgage with bad credit
When you first apply for a mortgage, the lender will ask whether you have had credit issues in the past. This includes defaults, missed payments, loan payments and CCJs.
If there are missed payments on utility bills, loans or credit cards in the past then extra evidence may be required by the lender. This will be used to prove an individual can afford to pay a mortgage now. Moreover, the lender may also request additional payslips and bank statements.
You will also be required to provide everything that you normally would for a standard mortgage application. Such as the following:
Types of mortgages
Choosing the suitable type of mortgage for yourself could save you thousands, so it is imperative to understand the different types and how they work.
After taking out your mortgage, it will be necessary to pay an initial interest rate for a set duration. This will most likely be a fixed or variable rate mortgage. But what are they?
Fixed Rate Mortgages
A fixed rate mortgage guarantees your interest rate to be fixed for a set period of time. For most individuals, this will offer peace of mind as you will know the exact amount you will be required to repay every month during this period.
You will be able to fix your mortgage for upto one, two, three, five, seven and even 10 or 15 years. Although the latter fixes are rare. The longer your rate is fixed for, the higher the interest rate. This is due to it being difficult for the lender to assess the future outcome of the market, especially over a longer duration. As a result, this means you are paying for the security of your rate knowing it will not rise no matter what happens in the market.
Variable Rate Mortgages
There are two main types of variable rate mortgages: tracker and discount mortgages.
Tracker mortgages are based on an external rate – typically the Bank of England base rate plus a percentage. If the base rate rose, then the interest rate on your mortgage would follow. For example, if the Bank of England base rate was 0.1% and if the interest rate on a tracker mortgage was the base rate of +1%, you would pay 1.1% interest.
The base rate is decided by the Bank of England’s Monetary Policy Committee. They meet 8 times a year to vote on what the rate should be. This means that the base rate could actually change 8 times a year; however this would be highly unusual.
With discount mortgages, you will pay the lender’s standard variable rate (SVR) with a fixed amount discounted. The rate chosen by the lender will not frequently change. For example, if your lender chose 4% as their rate and your mortgage came with a 1.5% discount then you would end up paying 2.5%.
If your interest rate rises, your monthly repayments will follow but you would be paying more in interest rather on the money you have borrowed.
When repaying your mortgage, part of the money will go towards the interest charged by your lender and the second part towards the money you have borrowed. The saving that you will make only relates to the interest that you pay.
Discount mortgages can come with a ‘collar’ – this is a set rate that they can’t fall below or there is a cap on the rate that they cannot go above. It is important to look out for these features when selecting your deal.
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