Integra News How much mortgage can I Afford?
How much mortgage can I afford?
Did you know that there are almost 41,000 google searches a month asking this very question?
Because it is such a commonly asked question, we thought we would try and answer it as best as possible. Especially given all the changes in 2022 since the Bank of England base rate increases and the rising energy costs.
In the main, most mortgage lenders will still use a traditional method of lending anywhere between 4x to 4.5x income. It isn’t quite as true as it looks because the FCA (Financial Conduct Authority) set out regulations and directives for the banks and building societies to abide by and then they provide their version of those rules.
Another way lenders review your mortgage lending amount and the newer method is to combine the traditional income multiples with ‘stress testing’. Let’s say for example your mortgage interest rate quoted by your mortgage broker is 2.5%, the mortgage lender will assume the rate is as high as for example 6.50%. Why do they do this? Simply because they want to future proof your mortgage lending and ensure it would remain affordable should interest rates increase in the future.
To assess how much you are able to borrow your mortgage broker or mortgage adviser will look at your income source. If you are employed, mortgage lenders will take 100% of your gross basic pay if you are PAYE and then they will look at the history of other elements such as overtime, bonus and commission. If you are self-employed there are several different ways they will review it:
Sole Trader or Partner:
They will typically average the last 2 years NET PROFIT, unless your latest trading year shows a decline in profit then they will use the latest figure instead
Limited Company Director:
A lot of clients think they are classed as employed but that’s not the case. The mortgage lender will deem you as self employed if your shareholder is in excess of 25%. In this instance the lender will use one of the following methods to use as income:
Salary & Dividend average over the last 2 years
Salary & Profit Before Corporation tax average over the last 2 years (Very rare)
Salary & Profit After Corporation tax average over the last 2 years (Limited availability)
What about my debt? Will they look at that?
Yes, they will do indeed. In fact most bank and building societies will factor it in even if you declare that you intend to pay it off before the new mortgage starts.
With fixed payment debts like loans, hire purchase, lease agreements or pcp (Personal contract plans) will be factored in using the monthly payment amount. They will also take into account your overall balance to ensure you haven’t exceeded the debt to income ratio which is usually around 40% of your gross annual income.
With revolving credits such as credit cards, store cards, mail order catalogues or overdrafts it works a little different. The mortgage lender will generally assume you pay back about 5% of the debt each month and will also look at the credit limits to see what tangible access to cash you have.
What other factors can impact on how much I can borrow on a mortgage?
To name a few the lenders will look at:
- How many dependents you have
- Any childcare or school fees you may have
- The loan to value (LTV). The smaller the deposit the smaller the amount the lenders may be willing to lend to you.
- Credit history
- If you have a history of missed or late payments then this could impact many things, the amount you can borrow being one of them.
In all circumstances we would always strongly recommend that you speak with a qualified mortgage broker/mortgage adviser. They are qualified to review the mortgage market and to establish what your borrowing ability may be. This is important to do. It can save you a lot of time and stress and also help to protect your credit profile.
For further information on how much mortgage you can afford, please feel welcome to contact our team of experienced mortgage advisors to hold a detailed conversation.
Remember, a mortgage is a secured loan against your property. Your home may be repossessed if you do not keep up your repayments on your mortgage or secured loan.
To find out more about the mortgage market, the latest mortgage rates and hints and tips on how to present an offer for a property to an estate agent, please feel welcome to contact our team on 0117 251 0083 or email enquiries@integraf.co.uk.
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