How much can you borrow for a mortgage?
Before you consider taking out a mortgage you have to make the required calculations that show the amount you are able to borrow for a mortgage. You need to go through more research than just simply calculating the number of monthly repayments you can handle.
In fact, mortgage providers could interfere and decide how much you can borrow for a mortgage. They view your financial outgoings and income and choose if you can continue with a certain mortgage when circumstances change and even if the interest rates increase.
How lenders calculate what kind of mortgage you can afford
Lenders used to decide the type of mortgage you can borrow simply by calculating your LTV (loan to value ratio).
Let’s take for example that your yearly income was £75,000. In the past, you could have borrowed five times your yearly income. That means that the amount you could borrow for a mortgage would be up to £375,000.
At present, lenders lend you only 4.5 times your annual income after calculating your loan to income ratio. In addition to that, now lenders also take into consideration different personal living expenses.
This drastic change that has happened in the past years was made possible by the FCA (Financial Conduct Authority). After fully studying the mortgage field in 2014, they were able to create a better affordability assessment system.
Now, the lenders also conduct a ‘stress test’ to prove your ability to pay the mortgage.
What does the lender take into consideration?
Before coming to a conclusion about how much you are able to borrow for a mortgage, lenders will consider:
1. Your financial outgoings
This will notify you of any missed credit expenses that could make the lender turn you down and will give you a while to correct any existing mistake.
Before applying for a new mortgage, you need to make sure to check your credit report. This will help you make improvements. Your credit report also informs you of any unpaid credit payments.
Solving such mistakes on your credit report increases the chances of getting approved by a mortgage lender. Your outgoings include:
- Maintenance payments
- Any kind of insurance
- Credit card repayments
- Credit agreements and loans borrowed in the past
Lenders will also ask you numerous questions about your spending habits regarding general living costs.
2. Your monthly/yearly income
- Investment income
- Your pension income
- Income that is tied to any form of financial support from an ex-spouse
- Additional earnings such as freelance work, bonuses from a job, etc.
You need to verify every kind of earnings by providing bank statements. If you are a freelancer, you need to verify:
- Business accounts you own
- Your bank statements
- Verification of taxes that you have paid for the earned income
3. Future events that can make a change
The lender usually decides the amount you can borrow for a mortgage if you get put in circumstances such as:
- Giving birth to a baby
- Becoming unemployed due to illness
- Having a career pause
- Your partner becomes unemployed
- Interest rates increase
Lenders are more likely to increase the amount you can borrow for a mortgage if you have built up a savings account. What is considered a good amount of savings must be able to cover three months of mortgage payments including outgoings.
Are you able to get a mortgage if you are self-employed?
It is possible to get a mortgage if you are self-employed or have earned your money abroad. But the chances are a lot lower.
You need to provide lenders with definite proof of income, which in most cases is challenging. You should be able to provide:
1. Tax returns
You need to show proof to lenders that you have paid tax returns for your earnings.
2. Business accounts
This is a much easier option. Lenders usually approve having at least two to three years of account records.
Your chances of getting approved for a mortgage are more guaranteed if you have an established business. Those who have recently begun being self-employed may get refused by the lender for a mortgage.
If you are new at being self-employed but your spouse isn’t, the amount you can borrow for a mortgage can be calculated using your partner’s income.
What do you need to know about LTV?
You’ll recognize that lenders talk about the value to loan ratio on comparison sites and Best Buy tables. The LTV is the percentage of the property value you have taken out as a mortgage.
It is easily calculated by simply subtracting your equity or deposit from the full value of the property you are planning to purchase.
Let’s take an example, if you have a £10,000 cash deposit for a £50,000 home is just 20% of the full value of the property. That means your mortgage covers 80% of the property.
LTV’s are always affected by the price of the property you have chosen and the number of deposits you put into the property. It is crucial to keep in mind that prices move regarding properties.
Prices indicate the ability for you to take out a remortgage on the property. Suppose you purchased a £50,000 house and put down a £5,000 deposit on it, leaving you owing only £45,000.
This means you have a loan to value ratio of 90%. After a period of time, if you have paid a part of the price, and you owe 40,000 pounds, you might be eligible to get a remortgage. If the house’s price has not changed since you purchased it, your LTV becomes 80%.
Although if the property’s price has changed and is worth more, it likely means that you can get a better remortgage deal. But if the house’s value drops, you might now owe more money than you would originally have paid for. This is called negative equity and you would not be able to get a remortgage.
Putting a larger amount of your savings into your mortgage can get you a better rate.
If you want a lower interest rate when borrowing for a mortgage, you need to have a larger deposit or equity put down for the property.
Different lenders will provide you with different prices of loan to value bands going from 60% up to 95%. The lower the LTV is the more money you will save.
Someone that borrows below 60% will usually pay the same interest rate that comes for borrowing 60%. Although if you borrow more than 60%, for example, if you borrow 61% you will get increased interest rates.
If you have a high loan to value ratio for example 75%, it is better to wait to gather extra funds for your deposit. This could help set you down to at least 0.1% lower.
Although your LTV has not changed drastically, the chances of being able to borrow for a mortgage will increase. It will also lead you to not deal with a large amount of paperwork.
You can drop an LTV band if:
1. You get your property value higher
When deciding to borrow for a mortgage, you have to view the property’s present value. You need to get the top value conceivable, however, it should be sensible, as lenders usually will get a free valuer to check it later.
Valuers don’t simply select a figure you can borrow for a mortgage. They always conduct all possible research to decide what kind of mortgage you best deserve.
2. Borrow less than the maximum
Work out how much you would need to provide in order to drop to a lower loan to value band and see how much your interest rates would improve.
You could do this by overpaying your mortgage where you also get the upside of getting a smaller mortgage with a low-interest rate.
Furthermore, if your LTV falls, it helps with regards to remortgaging. You might have the option to get a less expensive arrangement for a property than if you hadn’t overpaid your mortgage.
If you are thinking of getting a loan and want to have an idea of how much you can borrow for a mortgage, you need to do the proper research.
Although you cannot find the exact price you will be able to borrow, you can still figure out what the amount will be on average by yourself.
You need to follow up on your spending habits, lifestyle cost, previous mortgages, credit history, and most importantly your income.
Summing these up and comparing it with what lenders provide you with, depending on your ability to handle it, will give you an idea of how much you can borrow for a mortgage.
Find a great deal on your next mortgage
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How does a mortgage work?
A mortgage happens when a lender gives you money to purchase a home and you pay the loan back slowly with interest. The loan very secure as the value of the loan is secured against the home that it is helping pay for.
What is a mortgage broker?
Mortgage brokers are here to help you find the best mortgage deal on the market for your situation.
We match you to a lender who is willing to give you a mortgage and you don’t have to go searching for the right lender.
What types of mortgages are there?
There are two main types of mortgages, fixed and variable rate. A fixed rate mortgage charges the buyer the same amount of interest over the whole mortgage period, so all of the payments are the same.
A variable rate mortgage involves interest rates that can change, so your payments may be different each time.
If I have bad credit can I still get a mortgage?
Bad credit will not prevent you from getting a mortgage. We work with certified lenders who cater to a diverse range of clients and will find one to fit your situation.