How much can I borrow on a mortgage?

Times have changed over the past 15 years, the financial and the government market have realised that mortgage loans cannot be given without responsibility from the lender to ensure all possible checks are made to affordability, this means that the loan criteria is harder to meet, which whilst being inconvenient for some, is the right course of action. Interest rates are still low and have been for over ten years, who knows what time bomb we are still sitting on when interest rates rise for those people that have over borrowed.

As a consequence of this realisation lenders have now approached sanctioning mortgages in a different way and understanding how they work may help you with your application.

What will a mortgage lender assess on an application?

Not so much an assessment but a starting point are multiples of income 3x, 4x your gross income, if you earn £50k you can look at borrowing £200k, but that is just a guide as its affordability that is the most important criteria, if you have lots of outgoing long-term commitments passing an affordability check will be difficult.

The affordability checks were made mandatory by the Financial Conduct Authority in 2014 following a review of the mortgage market the review concluded that the market did not look ahead for borrower’s future affordability and introduced the stress test.

The stress test on mortgages looks at your ability to keep up repayments on a mortgage when interest rates rise or your lifestyle changes, it’s not about how the figures look on paper now, it’s what happens in the future when you add on a couple of percent.

When you are looking to establish what you can afford a mortgage lender will-

Check your income.

Anything you can prove make sure you include it, your salary, overtime, bonuses, pension, investments; financial support anything you can as long as you can supply evidence of the income.

It will depend on both the lender and your type of income as to how they will calculate it; a bonus may be treated differently than your salary for example.

If you are self-employed you will need all returns and bank statements over, at least, the past three years.

Look at your outgoings.

All your outgoings will show up on credit checks so don’t wait to be asked for information on any financial outgoings, you need to obtain statements on everything such as credit cards and loans, insurances for the pets to subscriptions to the gym, provide as much as you can.
Produce a budget planner showing your lifestyle outgoings, from eating out to haircuts, it all helps and is very handy for you to do as it helps you realise the impact of your mortgage.

Of course, it’s also highly likely that the lender will ask to see bank statements.

Mortgage applications and the stress test.

A mortgage company will look to see if you can afford your repayments in times of change the most significant element of this would be if interest rates increased, to see if you can pass the stress test the lender is asked to look to see if you can afford the repayment at 3% higher than their standard variable rate – ouch!

You may have a fixed rate at 3% but the SVR maybe 5%, so the lender will look at an interest rate of 8%, on a £100,000 mortgage that is an additional monthly payment of £400 + per month.

The rules will affect the market, but many lenders say that they have been stress testing for the past 12 months, so things will not change, one thing that definitely will change is to the level of scrutiny and that can cause delays, evidence suggests that sellers want to know a mortgage is in place before accepting an offer.

On the financial side of house buying, you must start as soon as possible and collect as much evidence as you can.

Top tip use your savings as evidence of affordability, if you are looking to move in the future and you are saving for a deposit, understand how much your mortgage payments will be and show that, over the past few years, you can make that payment because you already have done through savings.

The stress test will also consider changes to your lifestyle, what will happen if you lose your job, or you are long-term sick, or even if you are having a baby, in my opinion, some of these tests are bordering on discriminatory but they are considered.

You may already have protection through your employee or via insurance to cover changes in your circumstances, but the lender will ask so you need to know your answer.

So, mortgages are harder to get but how much can I borrow?
If you need a quick figure there are lots of Mortgage affordability calculators online but they will not give you a definitive answer, our recommendation would be that you speak to a mortgage broker, they will understand your situation and match your situation to the market, they will be able to tell you how much you can borrow and how much it will cost.

The purpose of this article is to focus on the financial side of your application; a lender will look at a number of other points such as your age, the property, and your deposit.



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