So, you are about to buy your first home or perhaps you are about to move home and you want to know what property prices you can afford. With over a hundred different banks and building societies and more than 14,000 mortgages available, it can feel like you have a mountain to climb.
Before you start to look for a property you need to know how much you can borrow on a mortgage. Each bank and building society can calculate this with their own mortgage affordability calculator. This could be anywhere between 4 and 4.75 times your household income. In some circumstances this can be as high as 5 times your household income.
Calculating how much you can borrow for a mortgage
In this guide we will take you through a few steps so you know what to do to maximize the amount that lenders will lend you. Below will help you work out how much you can borrow before starting your mortgage application process.
How do the different mortgage lenders calculate what you can borrow?
In 2014 the government decided enough was enough and brought out some new guidelines for all banks and building societies called the Mortgage Market Review (MMR). The two main reasons behind this review were to stop poor lending decisions made by the lenders and to prevent consumers from being confused by the mortgage options open to them.
Banks and building societies were given strict guidelines as to what customers could borrow, based on their affordability to pay for a mortgage. This therefore saw the start of the mortgage affordability calculator.
Each bank and building society has their own mortgage affordability calculator meaning that each lender will lend you a different mortgage amount based on their understanding of the government’s guidelines.
Are all Mortgage Affordability Calculators the same?
Although every lenders mortgage affordability calculator looks different and will also ask you a variety of questions, they are all doing the same job which is to calculate what size mortgage you will be able to afford on a monthly basis. You will find though that if you used 10 different lenders mortgage affordability calculators, they will say you can borrow 10 completely different amounts.
What questions will I be asked on the affordability calculators?
You will be asked a lot of questions which will differ from lender to lender, however information which they will all want to know is:
- Address history from the past 3 years
- Basic Salary
- Any debts and loans
- How many dependents you have
- Deposit available
How do the different lenders decide how much I can borrow?
Once you have entered all the details each lender will then calculate how much they think you can borrow. This is where it gets complicated as they will all tell you a completely different amount. It is worth noting that you need to be very accurate when entering information into the mortgage calculator especially when it comes down to how your income is calculated. It is also essential that when you enter details on your loans and debts that the amounts outstanding and the monthly payments are as accurate as possible.
How can I maximize how much I can borrow?
There are two ways you can maximize the amount you can borrow:
Income – If you know that a wage rise is imminent then your new salary can be taken into consideration. If overtime or commission is to be used, then make sure the last 3 months are as level as possible. Lenders do not like it when overtime varies and will take your worst month and use this. Some lenders may consider using the last years P60 which can be helpful if your income has a lot of different elements like night shifts, commissions and bonuses.
Debts and Loans – When calculating the amount of mortgage you can borrow the amount you are currently paying on debts and loans will greatly reduce the amount you can borrow. For example, £100 each month paid on a loan could reduce how much you can borrow by as much as £8,000. Therefore, if you only have a few months left paying off a loan it could be beneficial to pay the loan early.
Didn’t they used to lend more?
They did for sure! Prior to the law on maximum borrowing changing in 2014, it was possible to borrow far more. Although this meant you could get a bigger mortgage and therefore a bigger property, it also meant you would have a larger monthly mortgage amount. Although the mortgage interest rates are very low at present there can be no certainty that they will stay this low. If interest rates start to increase it would mean that your monthly mortgage payments will increase. This is why a lot of people got into real financial difficulty because each time the interest rates went up so did their mortgage, unfortunately resulting in some people losing their homes.
Will the number of dependents make a difference on the amount I can borrow?
The number of dependents will have an impact on the amount you can borrow. Dependents can be children or even elderly parents living with you that financially depend on you to put a roof over their head.
One situation often overlooked is when a couple have a mortgage in joint names but one of the applicants has no income. This person is then also considered to be a dependent. It may be worth considering if it is possible for them to get a part-time job even if it’s for only a few hours a week. This will mean they will no longer be considered a dependent and any income they earn will be added to your overall income. This can make a considerable difference on how much you can borrow!
Will I be able to afford my mortgage if interest rates increase?
One of the main factors behind mortgage affordability beyond affording your mortgage now is whether you will still be able to afford it if rates increase. When the mortgage calculators work out how much you can afford, they also allow for interest rates rising by 5%. This is why quite often you will think that you can easily afford the mortgage and the truth is you really can, as it is calculating based on you still being able to afford the mortgage even with a large increase in interest rates. This should give you real peace of mind knowing you will always be able to afford your mortgage.
I am a high earner so does this mean I will be able to borrow more?
Very possibly. If you are a higher earner this will mean that you have a bigger disposable income and therefore lenders will consider that you could afford to pay more per month on a mortgage payment. Although each lender has a different understanding on what they deem to be a higher earner, it seems that most need you to have an annual household income in excess of £60,000. In these situations, some lenders will increase the borrowing to 5 times your income.
How can I find out which lender will lend me the most?
So, with over a hundred different lenders how do you find the lender that will lend you the most? This is straightforward! For local mortgage advice, find yourself a whole-of-market mortgage adviser.
A whole-of-market mortgage advisor will have access to every lender and therefore will be able to see which bank or building society is willing to lend you the highest amount and also the best mortgage rate deals.
How do I find a whole-of-market mortgage advisor?
Google whole-of-market mortgage advisor and you will get a list of mortgage advisors that are near you. Have a look at the top 5 company websites and make sure they look like a company you would want to arrange a mortgage for you. Also look at the different mortgage advisors Google reviews to make sure other customers have had a great experience. It may also be worth checking the mortgage advisors Facebook page to see what reviews they have received.
Will a mortgage advisor charge me for their services?
Although many mortgage advisors do charge anywhere between £500 and £1,000 to arrange a mortgage, you will find that some mortgage brokers that do not charge for their services. These are called NO FEE mortgage advisors. The best way to find a market that won’t charge you is to Google whole-of-market no-fee mortgage advisor.
Who are YesCanDo Money, idependant mortgage brokers?
YesCanDo Money are a whole-of-market no fee mortgage advisor. They will search the whole market to get you the best mortgage rates and deals. YesCanDo Money can also search the whole market to find out which lender will give you the biggest mortgage and also the best mortgage rate deals.
Based in Havant between Southsea and Chichester, YesCanDo Money have a large team of experienced mortgage advisors and mortgage managers who are at hand to help you, so why not give them a call on 02392 373235 or drop them an WhatsApp message for FREE Mortgage Advice.