Beginners Guide to Mortgage Affordability
When it comes to buying a property, whether that be your first bachelor pad, upscaling to fit the kiddies in or even your dream home, the first consideration should always be – Can I afford this? The reason why? Because this will be the first question your bank / lender will ask through a series of complex tests and calculations. Whilst on the surface a property may seem comfortably within your budget, there are some crooks and caveats that you should be aware of when applying for a mortgage. Here are some of the things the bank will be looking out for when you apply;
The first hurdle you will have to overcome with a bank is their own in-house income multiples. When assessing your mortgage application, this first thing a bank asks is how much money do you earn – what is your annual salary. The bank then takes this amount (for all applicants) and then times’ it by a set multiplier to determine your maximum loan. For example, imagine a couple buying their first property. Person A earns £20,000 per annum and Person B earns £30,000 per annum. The bank’s income multiple is 4. The bank will add the annual salaries together (£20,000 + £30,000 = £50,000) then times is by their multiplies (£50,000 x 4 = £200,000.) That means in this instance, the maximum a bank would lend the couple is £200,000. Then they will potentially reduce this with the other considerations….
Loan to Value
Loan to value is essentially the size of your mortgage loan compared to the value of the property you are buying. For example, if you have a £20,000 deposit for a £200,000 house, you will require a loan for £180,000, or 90% of the property value. This would be known as a 90% LTV mortgage. Banks and Lenders offer different rates, products and fees as you change LTV brackets – usually in denominations of 5% (i.e. 90%, 85% and 80%.) It is worth considering your deposit size when it comes to affordability, as often at higher LTV (say 90%) the bank will reduce the income multiple as the risk of negative equity increases.
For the vast majority of people, their mortgage loan will be the biggest debt they ever take out throughout their lives. That’s not to say that other, smaller debts aren’t considered by a prospective bank / mortgage lender when assessing affordability. A bank will ask for all of your secured and unsecured debts at the outset (then double check these with a credit search so being honest is paramount) before considering whether this affects your mortgage affordability. If you have a lot of debt, the bank will consider lending a lower amount as you have already fixed amounts you are required to pay elsewhere each month. Types of debt considered include personal loans, credit cards and hire purchase agreements if you have a car on lease.
Not only will mortgage lenders consider WHAT you get paid, but also HOW you get paid. Your type of employment will be the first thing considered – whether you are employed and get paid a salary, self employed or a sole trader. If you are self-employed, you will need to provide a lender with accounts history, sometimes up to three years. They will consider your net profit figure as well as any losses / outgoings, so it is important to fully declare your earnings. If you are employed, your type of contract will be important, including whether you are part-time or full-time, and if you are on a zero hour contract you will need to show some sort of consistency of earnings so the bank will get a feel for how much you can afford.
One of the supporting items you will have to provide a mortgage lender is a minimum of 3 months bank statements. An underwriter for the bank will analyse these and consider any regular outgoings – such as subscriptions, regular payments and other income patterns. As well as these, they will have their own internal calculator to consider how much the average person requires to live – including extra costs if you have any dependents. Another consideration, even if you own your own vehicle outright, is travel costs. If you are spending a set amount on petrol each week, the bank will take this into account when assessing affordability.
Finally, on top of all the above, a bank will also consider the area in which you live, and often adjust their figures / calculations on any of the above accordingly. For example, when factoring in living costs, a bank will use a higher figure for applicants living in London compared to applicants living in Burnley, as in general the cost of living is higher in the former. This will also be tailored for LTV and income multiples, as most banks have different policies for different areas.
Above is just an indication of the type of things that banks will consider, and each bank will also have their own little quirks and adjustments to each of the above which is why it is important to consider the whole market when it comes to searching for the right mortgage for you. If you use a mortgage broker or independent financial advisor they will consider all of the above before even approaching a lender, and with their experience and whole of market knowledge they will know which lenders to approach according to your circumstances.
If you would like to know more, contact our resident mortgage expert Ashley King on 01282 452255 or email firstname.lastname@example.org