If you are a first time buyer, looking into a buy-to-let or simply looking to remortgage, you will have asked yourself "How much can I borrow?" or "How much of a mortgage can i afford?".
Traditionally, mortgage lenders applied an income multiple rule to decide on borrowing capability. So if you earned £25,000 per year and the lender lends times this you would be able to achieve £100,000. This was the simple way.
Lending is now based on how much the lender (bank/building society) feels you can afford to borrow, not what you think you can afford. So if you want to read about what lenders will specifically look at when determining what they will lend you, then read these four points below:
Loan to Value (LTV) – Purchasing a £200,000 property with a £50,000 deposit would mean a mortgage of £150,000, 75% of the property’s worth or 75% LTV. Lenders will set a maximum LTV for each of their products. The higher the LTV the higher the risk to them, the higher the interest rate charged and subsequently the higher the monthly cost.
Income – Many lenders still use income multiples to assess the maximum they will lend. They will carry out an affordability assessment to decide how much they are willing to lend in each case. All income that is declared will need to be provable through payslips, accounts, tax returns, benefit statements etc. Lenders vary on how much extra income such as bonuses and overtime you will be able to use and some will not use at all.
Outgoings – Regular outgoings such as household bills, debt payments (loans / credit cards and insurances can all affect how much a lender will lend. Childcare costs are an important factor and most lenders will reduce borrowing capability dependent on the number of children even if there are no childcare costs.
Credit Score / History – How you have maintained your credit profile in the past plays an important part in how much you can borrow. In the worst cases a lender may decline to lend or a low credit score will cause a lower LTV allowance and subsequent reduction in borrowing amount. Missed payments or going over credit limits can all affect credit history and result in a lower borrowing capability.
If you have read through all this and now understand a bit better about how mortgage lending works, then you might be looking for your next/first property! MWS has a team of qualified mortgage advisers, our extensive knowledge means that we know which lenders will suit your goals. Our team are more than happy to speak and meet with you about any mortgage needs you have. Contact us today to take the first step towards your new home!