With the effects of the credit crunch still biting and lenders seemingly unwilling to relinquish their grip on the purse strings just yet - we look at how to determine the amount you are able to borrow for your mortgage.
What you should do first?
The first thing you should do when considering a mortgage is to prepare a detailed budget. As well as considering your income, think carefully about your outgoings as well and whether you have any existing loans or debts that you are already paying back. Items that will help you to create a budget are: payslips, P60, bank or credit card statements.
As a mortgage is a long term commitment, so you should take the time to think about your future plans and how they could impact on your mortgage. Do you have long-term job security? Are you on a set career path? Do you plan on starting a family? How would it affect your repayments if one of you lost your income? All these things could have a potential impact on your ability to repay your mortgage.
Once you have created your budget you should be in a position to establish how much you can afford to borrow. A ballpark figure to bear in mind is that your mortgage should not amount to more than 40% of your total earnings.
Salary
Of course, the amount you can borrow does tend to vary from lender to lender. However, industry standard multipliers tend to be in the region of 3 or 4 times your salary. If you combine your salary with a friend or partner then you could always borrow more by getting your mortgage based on joint income.
If you are self-employed then you would usually have to provide trading accounts going back at least 3 years in order to establish your earnings. Alternatively, you might consider a guarantor mortgage whereby a parent, relative or friend effectively guarantees your mortgage in the event that you fail to make your repayments.
Remember that affordability is sometimes more important than just trebling your salary when it comes to deciding how much to borrow – especially in today’s climate – and this is why it is important to prepare a detailed budget first.
Deposits
Typically, your mortgage will only cover a percentage of the cost of the house that you wish to buy - usually around 75% of its total value. There are still some lenders offering 100% mortgages, but the higher interest rates associated with these tend to make them prohibitive to many first-time buyers.
You will be expected to make up any shortfall in the form of a deposit, so it is always a good idea to save as much as you can. The more you can save, the better, as it means that you are more likely to get a lower rate of interest. Also you will be reducing the chance of falling into negative equity should the value of your house fall below the price you paid for it when it comes time to sell it.
Other costs
When preparing your budget for your mortgage, it is important to remember that there are other costs associated with buying a house. Things like valuation fees, surveys, legal fees and stamp duties all have to be considered, which can be taken care of by either borrowing more or paying for them with your savings.
You should also take into account that owning a house costs money in terms of repairs, maintenance etc. Overstretch your finances by borrowing too much and you may well find yourself unable to meet your running costs.
