How much you can borrow on a mortgage depends on several points - it is much more complex than four times income; since the Mortgage Market Review and the Credit Crunch, the Financial Conduct Authority has made significant changes to the way your affordability is assessed, and ultimately what a Lender is prepared to lend.
Here are some points looked at, when assessing the amount available to you and why they make a difference:
Loan to Value this is the amount of mortgage you need to either purchase or remortgage based on the current value of the property. This is a major consideration and has an impact on several levels; if you have a 5% deposit and you are looking for a 95% mortgage, the lender would feel less confident as the amount of money the lender is putting into the purchase / remortgage is a much higher amount compared to the amount you are putting in, so therefore several things happen.
• Firstly if you are looking for a 95% mortgage you will need to have an excellent credit history, as the lender considers 95% mortgages more risky than for example a lower loan to value such as 75% - this is down to the lender having confidence in your application, if you want a high Loan to value the lender needs to be confident in you, and your credit history is a way that they assess you.
• Secondly they will lend a lower income multiple if you are looking for a 95% mortgage; for example a lender might limit income multiples to four times if you need more than 85% loan to value, but they might go up to five times if you are able to make a larger commitment such as 25% deposit.
It is all about lender confidence in you the borrower. If you need a higher loan to value also expect the lender to charge a higher interest rate, if you are able to put a higher deposit of your own money the lender will reward you with a lower rate of interest.
Credit History this is a way of checking you out! The lender doesn’t know you personally, so they need to look at your history over the last six years, just so they can see if you keep up with your credit commitments. If you have an excellent credit history you will qualify for all Lenders and this means that you will benefit from the most competitive rates of interest – however, if your credit file isn’t so good, this can both restrict choice in lender and limit the Loan to Value. This would mean that you would need a larger deposit, but it isn’t the end of the world as many lenders will now look at more recent years and with a 15% deposit you would still benefit from interest rates that are competitive. If you have never used credit in the past this can also affect your status as you haven’t got a history that the lender can see, so in a way it is like having no reference. This is why it is important to build a positive credit history making sure that all monies owing are paid on time.
MAKE SURE YOU ARE ON THE ELECTORAL ROLE, and No PAYDAY LOANS.
Employment Type this is a way of the Lender knowing if you are able to continue working to your stated retirement age. If you are self-employed it is preferable to have 3 years history and a positive growth in profits. If you only had one year’s accounts then again it restricts you to choice of lender, and if you had three years’ accounts, and each year had a decreasing profit, the Lender would be concerned that it could be a failing business and would lose confidence in your continued affordability to meet your monthly mortgage payment. In this case this would usually lead to a decline.
If you are currently in the Armed Forces and are looking to leave, you would need to tell the lender that your circumstances are due to change. The lender would want reassurance in the way of a formal job offer to ensure that you are able to meet the mortgage payment moving forward, as in this case it would be unfair to put you into a position where you were unsure of your continued ability to meet the monthly commitment.
The lender will however take your pension income into account, plus your spouse’s income and any benefits you were entitled to, such as Child Benefit.
Commitments when we talk about commitments you automatically assume we mean credit cards, loans, and hire purchase agreements - well it is more than that. The biggest commitments are your dependants; your children and possibly your partner if dependant on your income. We all know how expensive children can be, so this is taken into account when assessing your monthly affordability. Your lifestyle is also taken into account along with your regular commitments such as credit cards, personal loans and hire purchase agreements. At the point of assessment you are required to have three months bank statements assessed from all accounts you hold. From this we can see if you like to gamble or treat yourself on a regular basis, and can you manage your money, or you are always over drawn? If you are only just making ends meet before you take on a mortgage commitment, how can you demonstrate you can afford the added commitment?
PLEASE DO NOT TAKE ANY PAY DAY LOANS WITHIN 12 MONTHS OF A MORTGAGE APPLICATION. It is important when your mortgage adviser assesses your affordability that you are left with sufficient to continue with your preferred lifestyle, or after a few months you could feel like the mortgage / house has become a burden, you need to be happy in your new home – not under pressure.
The Property remember the mortgage is subject to your status and also a suitable security – the property itself. If you are looking at a New Build, some lenders may limit the amount available. This is because if you are paying for a new property everything will be in perfect condition. After you and your family have lived in the property for a few months, this then would not be the case. If the lender needed to repossess your property, it might have reduced in value, especially if there are still new properties available with new carpets etc.
If you are looking at a property to refurbish, then the lender will have to consider that you might not get round to it! So the value would be based on the current value – and if it is in a very poor state of repair, it may be unsuitable for mortgage purposes. If you are considering purchasing at auction this needs to be considered. A property needs to have a kitchen and bathroom to make it suitable for mortgage purposes as a minimum requirement.
For a Buy to Let property, this needs to be suitable to let from day one.
However, in answer to your questions, a good whole of market Mortgage Advisor would be able to hold your hand throughout the process, advising you and ensuring that you are comfortable and can afford your new home.
For any further questions, please do not hesitate to contact me.