When looking to purchase a house, it’s important to have an idea of how much you may be able to borrow from a mortgage lender, as well as how much you can afford to pay out monthly towards a mortgage, not just for your current situation but also for the long term.
What is the amount I can borrow based on?
The amount you can borrow from a mortgage lender is based on a number of different factors. In previous times, it was solely based on how much income you earnt annually, which was multiplied by lenders. This is known as the loan-to-income ratio.
An example of this is if your annual income was £30,000 you may have been able to borrow up 5 times this amount, making the maximum amount you could borrow £150,000.
Although your annual income is still a big factor, the amount you can borrow also depends on how much you can afford to pay out monthly, so the lender will take into account your monthly expenses and how sensible you are with your income.
This is called an affordability assessment, which was only brought into effect in 2014 by the Financial Conduct Authority. Mortgage lenders will also look at how possible interest rate rises would affect you as well as any changes to your lifestyle such as redundancy, starting a family or taking a career break.
When you apply for a mortgage, you will need copies of your payslips and bank statements to prove how much you earn and what your monthly budget looks like.
Which factors affect the amount I am able to borrow?
As well as your annual income, your credit score also has an effect on the amount you can borrow from a lender. Lenders use your credit report to look at how reliable you have been in the past at paying back your debts.
However, it’s possible that you may be able to get a mortgage without having a credit history, although there’s chance that not having one may hinder your chances of getting a mortgage, as the lender will need to know whether you are trustworthy or not.
On the other hand, if you have multiple debts from different credit cards, the lender may decide you are too much of a risk to lend to.
Sometimes taking out a joint mortgage with another applicant (a partner, family member or friend etc.) can increase the amount you are able to borrow. This is because having the multiple incomes mean that you are more likely to be able to afford and pay back your mortgage.
Making a mortgage repayment plan
How much you pay back per month depends on the amount your borrow, how long your mortgage term is and the rate of interest.
For example, if you borrow a small amount of money over a smaller period of time with a low interest rate, your monthly payments are likely to be quite low. However if you borrow a large sum of money over a longer time period, it is likely that your monthly repayments will be higher.
To get an idea of how much your monthly payments may be, you can use this mortgage calculator. To use the calculator, you will need to know your mortgage amount, interest rate and the term in years to see how much you will pay over the course of your mortgage and also how much interest you will pay on your mortgage.