Image by Nathan Dumlao on Unsplash.
How does borrowing work?
When buying a property, you’ll have an amount saved for a deposit, usually at least 10% of the property price. For the remaining amount, you’ll get a mortgage from a lender. You’ll then pay off your debt monthly.
When you have paid off your mortgage, you will own your home completely.
What determines how much I can borrow?
A mortgage lender wants to make sure that you’re a safe bet when lending you money. They want to ensure they’re going to get their money back.
As such they’ll consider:
- Your annual income
- Your credit score
- Your spending
Your annual income is probably the most important element when it comes to how much you can borrow. The fewer multiples of your salary that you’re borrowing, the better. Which means carefully working out what you can afford when it comes to choosing a property. If there’s nothing in your price range, you may want to consider Shared Ownership, Help to Buy or spend more time building up a bigger deposit so you can borrow less.
As a general rule, mortgage lenders are happy to lend up to 4.5 times your annual income. This is why buying with someone else can make it easier. However, it really does depend on what deals are out there.
Your credit score matters - if you’ve got a good history of receiving credit and paying it back, you’re more likely to be accepted for a mortgage and may even get a better rate of interest. If you’ve got bad debt or a variety of loans, credit card repayments or anything else that you need to pay back, you may struggle to get a mortgage.
However, the other side is also not having enough credit - if you’ve never borrowed before, either through a credit card or a monthly direct debit, you won’t have a credit history. As such, you don’t have anything to show a lender that you’ve paid back debts before.
Lenders are a lot more cautious than they used to be. Now they’ll not only consider your income and your credit history, but they’ll often ask for a few month’s worth of bank statements too. This is to check that you’re a responsible spender and you’re not spending more than you earn.
A mortgage underwriter will look at your statements and they’re not only looking for tell tale signs like constantly going into your overdraft or facing charges, but also for patterns in your spending. Is your statement showing up regular spending at the pub? Are you always eating out? Does your pay come in irregularly? Assess your statement and wonder if it shows you to be a responsible spender.
How do I borrow for a mortgage?
You go to a lender to borrow for your mortgage. You can compare offers on different comparison sites, or you can get yourself a mortgage broker to do the comparison for you. Brokers often have access to deals that may not be on the market elsewhere and can help you work out what is best for you.
You may also find that if you’ve been with a bank or building society for a long time, they may work out as a good choice for your mortgage.
Find a mortgage that works for you with Mortgage Advice Bureau.
How can I borrow more?
You can borrow more if you have more coming in - so getting a better paid position or increasing your income with a second job. You could club together with someone else to buy the property, which would increase your income and thus the amount you could borrow.
You can also talk to your broker. If you’ve had a mortgage before, have really good credit or there are other extenuating circumstances, they may be able to help you borrow more than you expected.
If it’s a case of the monthly repayment amount being too high, you can try to extend the length of the mortgage. So instead of 20 years, you would pay it back over 30. This would bring down your monthly payments, but you would pay more overall in interest. Extending the terms of the mortgage depend on your age and other factors. Talk to your mortgage broker if you’re concerned.
What happens if I can’t borrow what I need?
If you can’t get accepted for the amount you need, it’s worth bearing a few things in mind:
If you have been told this through a mortgage lender, don’t go and apply to loads of other ones at once. Applications for credit have an impact on your credit score, and a failed application can bring your score down. Take time, regroup and know everything about why the application failed before you apply again.
Increase your deposit amount. The bigger percentage deposit you have, the less you have to borrow. This can bring down the pressure on the lender. If you’re buying a house for £300,000 for example and have a 10% deposit of £30,000 you would need £270,000 from the bank. If that is more than 4.5 times your salary you may not be accepted. But if you had a deposit of £60,000, that’s 20%, so the lender would only have to lend you £240,000. You may be accepted for that amount.
You could also choose a cheaper property and increase your equity (the amount of the property you own, compared to the mortgage lender). This means you borrow less, and pay less each month.
Unfortunately, sometimes if you can’t afford it, that’s the end of it. In that situation you can wait and save more until you can, or you can choose a cheaper property that will allow you to build up equity in a few years. Hopefully, if the property increases in value, alongside how much of your mortgage you’ve paid off, you’ll have a bigger deposit to play with next time.
How much will it cost me?
Mortgage lenders make money on the interest they charge you. The more you borrow and the longer it takes to pay back, the more you’ll pay in interest. Be sure to be aware of how much interest you’re paying, along with mortgage set up fees, admin fees and everything else that comes with getting a mortgage. When your fixed rate (paying the same amount per month for a number of years) ends, be sure to look around for another deal and switch, as sitting on the lender’s standard variable rate is never going to be the best option for you.
It can be hard to know how much you can borrow, but remember that it comes down to income, spending and credit history. Work to save as big a deposit as you can and choose wisely when it comes to buying a property, so that your monthly repayments aren’t too high, and you’re not paying unnecessarily high rates of interest.