We are often asked by clients how they can work out much they can afford for a house. This is often a precursor to looking for a property, or guiding their children as first time buyers.
There are two aspects to this – how much a lender is prepared to lend you, and how much you can genuinely afford. Whilst these two things may marry up, your perspective and the lenders may also differ.
So, let’s talk about the lender first…
There are hundreds of lenders in the UK from traditional high street names like Halifax and Santander to less well known. Whilst many have very similar criteria for lending, some of the lesser-known lenders can take a more flexible approach.
Perhaps surprisingly, one of the things lenders look at is how much the borrower is prepared to contribute by way of deposit. The bigger the deposit, then very often the more competitive the interest rate.
Lenders also consider the following:
- Your annual salary plus any other income you receive
- Ongoing loans
- Credit card debt/balances
- Monthly outgoings
- Travel to work costs
- Anything else that is an ongoing financial commitment
Whilst it is possible to achieve higher multiples the maximum most lenders will offer is a multiple of 4.5 times your annual income. The FCA have imposed limitations on the number of mortgages lenders offer above that multiple, and it is usually for borrowers earning in the higher rate tax bracket.
Another aspect lenders always consider when deciding to lend is your credit rating.
This is an assessment of what risk you pose – so how likely you are to pay back the mortgage or default. We’ll talk more about this another time, but in essence, your credit rating is built up over time, based on your track record with any financial product, particularly loans and credit cards.
For younger first-time buyers this can prove a huge challenge as many have not built a credit rating. They haven’t taken out a loan or credit card, so have no credit history.
If you are intending to purchase a property with another person then the lender will look at your joint income and offer a multiple of that. Again, it is commonly a maximum of 4.5.
Think carefully before entering into a home purchase with another individual and make sure you have everything legally documented before you start. It can be very expensive and painful if living together doesn’t work out.
If you are a business owner there are lenders who will look at the business income and profitability and that could give you a higher offer if the business is doing well.
We encourage you to consider wisely before committing to higher multiples and whether you can afford the higher premiums that come from borrowing more money.
And that brings us neatly on to the second aspect of what you can afford – your own feelings on this.
When considering buying a home, it’s not just the monthly outgoings. You need to remember that a house purchase can come up with some big bills – stamp duty, legal fees, surveys, and lender arrangement fees.
If you are buying a property that needs work doing to it, you need to consider if it is still habitable. If not, you need to factor in rental costs, or living elsewhere while managing renovations.
Regardless of whether you choose a standard repayment mortgage or interest only, and we’ll come back to that another time, you still need to look at what you have left each month.
It can be hugely tempting to push yourself to go to the absolute maximum, to acquire a bigger property. However, if you never have enough money left each month to enjoy yourself – going out, doing your hobbies, going on holiday and so on – you will soon resent your home.
So, be sure that while a lender may be prepared to lend you 4.5 times your salary, it is the right amount for you. Only you can make that decision but get it wrong and it can be hugely expensive.
Remember our mantra – live the life you want to live today, not years down the line, when your circumstances may be different, and the opportunities are not there.
If you would like to talk to us about mortgages and the right approach for you, please give us a call on 01344 875 310.