Following on from our introduction to mortgages for first time buyers, one of the first questions we get asked is: How much can I borrow? There isn’t a straight forward answer to that, and here’s why…
How much can I borrow?
Before the recession, lenders typically calculated how much they would lend by applying a multiplier to the applicant’s salary. For example, if you were buying a house on your own, they might have typically been prepared to lend you four times your salary. If you were buying as a couple, they might have typically been prepared to lend you three times your joint salary. Those days of simple calculations, however, are over.
Now the key consideration is affordability. Whether you’re a first time buyer or not, the key questions are: Can you:
- a) Afford your monthly payments now?
- b) Continue to afford them if interest rates increase?
A far more detailed inventory of your income and outgoings, therefore, is now assessed. Once you’ve bought your food, paid your bills – including credit card spending and other loans – and covered the costs of running your car etc., how much is left every month? Once that’s been calculated, does the answer to the questions above stack up?
And there’s an additional aspect too… Don’t forget that how much a lender will allow you to borrow isn’t just about your ability to afford the payments. Your credit score and previous payment history on other loans is also taken into consideration. This can be where applications fail to get approval.
So it’s probably becoming clear now that it’s not possible to give you an easy answer to the question: How much can I borrow? It’s worth considering speaking to an adviser.
How much do I need to save for a deposit?
People groan at the thought of having to pay a deposit when buying a house. And yes, it does tend to be quite a substantial sum. However, it can serve to protect you in the future, so on balance it is a good thing.
The terminology that’s often used is ‘Loan to Value’. It’s unlikely that you’ll find a mortgage for anything more than 95% of the value of the property, and this would be referred to as an LTV of 95%. So, if you are going for an LTV of 95%, the minimum deposit you’ll need to have saved is 5% of the value of the house you want to buy. There is a good reason, however, to try to put down more than this…
You are far more likely to get a better rate the more deposit you put down. Going from only paying 5% to paying 10% deposit can make a huge difference to the rate you get, as well as the monthly payments you will have to make. If you can go even higher, the rates improve even more. Think of it like this: The more deposit you pay… the less you borrow… the better rate you get… the less your monthly payments are… which means, overall, the cheaper your mortgage is.
Other articles in this series written for first time buyers…
- An introduction to getting a mortgage
- Do I need an adviser?
- What types of mortgage are there?
- What is the process?
- What is ‘Shared Ownership’? What is ‘Help to Buy’?
- How to boost your chances of getting a mortgage