By Lesley and Helen S | Edited by Johanna Updated July 2015
This guide will help you work out how much you're likely to be able to borrow and how much you'll need as a deposit.
Lenders check how much you can afford
Lenders used to just multiply your income by up to five times to work out your maximum mortgage size. Now it's a lot more complicated as the lender has to check the affordability of the mortgage - but in basic terms, this just means whether you can afford the repayments.
But, again, it's still not quite that simple. Under new mortgage rules, which came into effect in April 2014, lenders must now obey strict guidelines to check whether a borrower can afford their mortgage repayments, not just at current interest rates, but also if interest rates shot up to 6-7%.
And, mortgage 'interviews' have got harder. They've always asked about income and big bills such as utilities & debt, but we're hearing stories of gruelling three-hour interrogations where people are asked how often they eat steak. This is an extreme example, but do factor in committed spending such as gym membership, insurances, car costs, entertainment and eating out, the weekly shop as well as childcare and school fees.
Ignore the scaremongering. It's not 'they'll tell you to stop eating steak'. They're judging affordability, so if eating out costs push you over the edge it can be a problem. If you can comfortably afford it, it's not.
Even so, it's best to make it as easy for your lender as you can. Most look at your spending in the three months before you apply for a mortgage, so if you know you're about to apply, try to live sensibly, and well within your means. Put up as much as you can for the deposit if it's your first mortgage, as borrowing less means less risk for the lender, and hopefully less close scrutiny for your finances.
Can I get an accurate maximum loan figure?
Use our How Much Can I Borrow calculator to estimate how much mortgage lenders might offer you. This is a rough estimate, and any significant outgoings, such as child maintenance, debt repayments or school fees, could reduce the amount a lender's prepared to offer you.
You won't get a fully accurate figure until you apply for a mortgage, but if you speak to a mortgage broker - or a lender, they should be able to give you an estimate.
It's worth taking a look at the mortgages on offer with MoneySavingExpert's Mortgage Best Buys. From there, you'll be able to benchmark a top deal, and then either find a broker or a lender who'll be able to help you with an estimate of how much you could borrow.
You can then get an agreement in principle (AIP). An AIP is a mini-application to the lender where it asks for some personal details and carries out a credit check to see if it would be willing to lend to you, subject to further checks. It'll also tell you how much it'll lend you.
If you're approved for the AIP, the battle's half over. It means the lender's looked at you, credit checked you, and on the surface, you're someone that it would lend to. But it is only half the battle, because it's not binding on the lender, or on you.
Find the best
If you're ready to get a mortgage, tell our Mortgage Best Buys tool what you want, and it'll speedily find the top deals for you.
Property investing newbie or an old hand wanting the top deal? Our free guide outlines all you need to know about buy-to-let.
Shall I take the max I can borrow?
If you're buying, you should find out how much you can borrow before you start house hunting, but be clear on how much you can afford.
If you're remortgaging, work out how much you need before finding out what a lender might be prepared to offer. It's easy to get tempted to up the loan size when the lender is willing, but don't exceed what you think is affordable.
Use the Budget Planner tool to work out what you can afford to repay. If it shows you can't afford a property, don't ignore it.
Only look at properties within your budget and avoid those even a fraction over. If not, you'll either break your resolve or be disappointed.
I'm self-employed. Can I still get a mortgage?
If you’re self-employed or would struggle to prove your long-term income – perhaps you’ve worked abroad or you are on a temporary contract – then getting a mortgage is tough. You’ll need cast-iron proof of your income, which isn’t easy. You need to show:
- Business accounts. You need to show preferably three years of accounts – though two can suffice depending on the lender - usually signed off by a chartered accountant.
- Tax returns. If you can’t show business accounts then two or three years’ tax returns are the next best option.
You’ll be assessed on net profits, not turnover. If this is likely to be complex, using a mortgage broker could help as they’ll know which lenders require what evidence.
While this can work for those in established businesses, to be realistic, it could mean those who have recently started working for themselves may not be able to get a mortgage. If you’re self-employed and your partner isn't, your mortgage may be calculated using their income only.
Note that self-cert mortgages - mortgages where you declare your own income and the lender doesn't require proof, common in the mid-noughties - are no longer available.
How are bonuses, commission or irregular work treated?
If you get bonuses or irregular income, unless the amount is guaranteed, lenders may only count half of this towards your annual salary when determining how much you can borrow. This varies between lenders, though.
Why isn't an agreement in principle binding?
An AIP only means that the mortgage lender's taken a cursory glance over your finances and your credit record and not seen anything that would mean it would turn you down.
When it comes to the time to turn an AIP into a full application, the checks a lender undertakes become so much more detailed. It asks for proof of income, it asks for your monthly outgoings and it does a full credit check.
If the lender finds something in this that it doesn't like, it won't lend to you.
The AIP might also not be converted into a mortgage offer because the lender doesn't want to lend on the property you're buying. Some won't lend on flats above shops, or properties contructed with unusal material.
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