Eight things that affect how much you can borrow on a mortgage
When looking for a mortgage, it can be pretty confusing as to why the amount you are able borrow varies from one provider to another. We all want the best deal and part of that usually means we look to see who will lend us the most, putting us in a position to make an offer on our ideal home.
It can feel frustrating at times disclosing various pieces of personal information and waiting for a magic figure to materialise, with apparently no control over how to influence the result.
Even though there are some factors which are impossible change, being aware of what mortgage lenders are basing their decision on may help you increase your borrowing potential.
Here is a list of eight things that might affect the amount of money you can borrow on a mortgage:
No surprise that income affects the amount you can borrow, but did you know that with some lenders not all income is treated equally? Aside from basic salary, other income such as payments from bonus, commission, overtime, shift allowance and self-employment should to be taken into account.
If this extra income is sustainable then some lenders will allow 100% of this to be included in the calculation. Other lenders however will only take a set percentage. If you do receive income aside from just your basic salary, then knowing which lenders use other incomes at the higher proportion will help in maximising your borrowing potential.
We all know that it’s best to have a larger deposit, this is because the more you have as equity, leads to a more favourable interest rate being offered. Unfortunately interest rate isn’t the only thing affected, as lenders also restrict the maximum loan they offer to those with smaller deposits.
Lenders view mortgages with a higher loan to value (where the loan is a high % of the purchase price) as having an increased risk, so to offset this they reduce the amount of loan they offer.
This is one of the reasons it can be hard to get onto the property ladder as some lenders place a ‘cap’ on the loan size for first time buyers. Not all lenders do this however, so it is worth doing your research if you are a first time buyer to ensure you are not being penalised in this way.
When calculating affordability, lenders will consider balances on a credit card, regardless of whether or not you are paying interest. If you have a 0% deal then this can seem pretty unfair, especially as most will assume a monthly payment of 3-5% of the outstanding balance as a monthly commitment.
However do not despair. Before you cut up your credit card, one way of getting around this is if you pay off your balance in full each month. Some lenders will ignore this debt from their calculations if this is the case.
Personal Loans/Hire Purchase
Monthly payments made on a personal loan or on hire purchase agreements will be subtracted from your income by lenders when calculating your level of disposable income.
If there is less than 6 months left to run on these commitments, then some lenders may ignore these outgoings. If you do have a personal loan or a hire purchase agreement it is worthwhile doing your research. You could then look to one of these providers and maybe delay your mortgage application for a while if your agreement is coming to an end.
Lenders vary on their stance to pensions. Some will treat it the same way as a loan and reduce the monthly income accordingly; others will ignore pension payments preferring not to penalise sound financial planning.
Depending upon your pension provisions it may be worth finding out which lenders do or do not take pension payments into account.
Children and non working partners
Dependants (so not only children, but anyone who is financially dependent on the income), are taken into account by lenders. They will assume a ‘cost per dependant’ each month and reduce your income accordingly.
This is not the only income reduction to bear in mind though. Childcare fees and private school fees will also be taking into account when lenders are making their calculations.
Unsurprisingly, all mortgage lenders look to credit reference agencies and use this information when calculating whether they will lend to you and the amount they will lend
Before you apply for a mortgage it is worth checking your credit score to see if there are ways of improving it, as those with a poor credit score will find it hard to obtain high street mortgages and at higher loan to values, may not be able to borrow at all.
The term is the total amount of time you have to repay your mortgage. For repayment mortgages (where you pay interest and capital each month), the longer the term, the lower the monthly payments therefore it may be possible to borrow more over a longer period. It is worth remembering though, that the longer the term the more interest will accrue therefore the total amount you repay will be more.
Mortgages can be complex and this list is by no means everything that is taken into account. It does however provide some insight into what lenders calculate affordability against and hopefully will aid you in determining what to look for when searching for a mortgage provider.
It is advisable to get professional advice and support when looking for a mortgage to ensure you have access to the whole mortgage market and obtain the most appropriate mortgage for your personal circumstances.