If you are thinking about getting a mortgage, one of the first things you will want to know is how much you can reasonably expect to be able to borrow. Knowing this will make it possible for you to come to a decision about what kind of property you want to buy, and in which area, and how much you will need to raise for a deposit, or indeed if getting a mortgage is the right thing for at this particular time. As with all things related to money and the economy at large, getting the answer to this question is not necessarily as straightforward as you might think, although there is a simple calculation that can give you a rough estimate.
Each lender has its own way of assessing how much money they are willing to let someone borrow, and those criteria can change. Fluctuations in the housing market can have an impact on lenders’ willingness to take risks, which means that many people these days are finding it difficult to get mortgages they would have received with ease ten years ago. Some things haven’t changed however, and one of those is that the biggest single factor that lenders assess in order to ascertain a borrower’s credentials is income.
In many cases the first thing a lender will do when assessing whether or not to give someone a mortgage is to conduct a quick affordability check. Put simply, this check involves taking the total income of those wishing to borrow and multiplying it by three or four. Consequently, if you want to get a rough ‘ball park’ figure of how much you can expect to be able to borrow from a mortgage lender, simply take your income (or combined income) and multiply it by three: this represents the low end of how much you can expect. Multiplying your income by four gives you the higher end of a possible total. So, if your income (or combined income) is £50,000, you can realistically expect to be able to borrow between £150,000 and £200,000.
Naturally, this calculation is no guarantee of success. Your personal circumstances and your outgoings will also be considered and may result in a lower or higher amount being offered than you previously expected. Self-employment, whether or not you have any dependents, the possible addition or otherwise of annual bonuses and so on, are all factors that are likely to influence a lender’s decision.
But the decision making process is not entirely based on income and outgoings. The size and location of the property also have a bearing, particularly with regards to whether or not it is appropriate or suitable for that person’s level of personal finance. The other major factor is the deposit.
How big is your deposit?
More and more, lenders are looking to see a substantial deposit before agreeing to give someone a mortgage. The likelihood of a borrower receiving a 100% mortgage, as used to happen frequently, is almost nil. Although lenders do give out mortgages with a high loan to value (LTV) rate (say 80% or even 90% – this means that the deposit is between 10% and 20%), these mortgages will come with higher rates of interest and comparatively unfavourable terms. Borrowers need to have a deposit of at least 25% (so the LTV is no more than 75%) in order to get the best deal possible.
As ever, getting good independent advice, and more than one quote from a selection of lenders, are the best ways of ensuring that you find a mortgage that suits you, both now and in the long term.