Finding the right size of mortgage you can get before you start house hunting is a sensible move to help you set your budget.
How much you can borrow with a mortgage is determined by a number of things: how big your deposit it; how much you earn; your credit score; and your current debts, to name a few.
Whilst many first time buyers may want to get the biggest mortgage they can, it’s important to think critically about how much you’re borrowing and how much your mortgage will cost you.
- Deposit and loan to value (LTV) ratio – The size of your deposit will determine your LTV and ultimately your repayments
- Monthly repaymentsThe most important figure in a mortgage are the monthly repayments, as that’s what you’ll need to pay each month
- Affordability criteria – When you approach a mortgage provider they will assess whether you can afford the mortgage
- Your credit score – Your credit score is vital for any borrowing you want
Crucially, make sure you don’t overstretch yourself. Try to ensure that your budget can handle increases in interest rates so you won’t struggle if your repayments become more expensive. So what should you be looking out for?
Loan to value ratio is the size of your deposit against the size of your loan. This is one of the big deciders for how much you can borrow and how expensive your mortgage will be.
Typically you need at least 10% of value of the home as a deposit to get a mortgage, so to buy the average UK house of £180,000 you’d normally need at least a £18,000 deposit to borrow £162,000 and pay for the house.
However, with the government’s Help to Buy scheme it is possible for first time buyers to get a mortgage with a smaller 5% deposit. So with a £10,000 deposit, it’d be possible to buy a £200,000 home.
It is worth noting that the bigger the deposit you can put down the lower your interest rates will be, and the lower the size of your monthly repayments.
- 100% LTV Mortgages – a rare and risky mortgage that requires no deposit but may require guarantors.
- 95% LTV Mortgages, 90% LTV Mortgages and 85% LTV Mortgages are at the high end of available LTVs, offering the most expensive rates, but can help first time buyers get onto the property ladder.
- 80% LTV Mortgages, 75% LTV Mortgages, 70% LTV Mortgages and 65% LTV Mortgages are in the mid range of LTVs, offering competitive rates giving manageable monthly repayments.
- 60% LTV mortgages – the lowest available LTV giving the cheapest rates, raising a 40% deposit might be tough but will deliver some big savings.
Before you approach a mortgage broker or lender, you should consider if you can comfortably meet the potential monthly mortgage repayments for the sum you need to borrow. This is more important than getting the biggest mortgage possible.
It will be the size of the repayments that will decide whether you can afford your mortgage on an ongoing basis. If you think the repayments put too much strain on your budget, then chances are you wont be able to borrow that much.
Our mortgage comparison tables enable you to see the different monthly repayments you could have with different mortgages or different amounts.
Make sure to plan for the future as interest rates will affect the size of your repayments.
Current interest rates are at historic lows and likely to rise sometime in the future, meaning your monthly repayments are likely to go up, unless you use a fixed rate mortgage.
When deciding whether or not to lend to you most mortgage providers will assess your financial circumstances:
What’s your income?
Your income is key to the decision of how much a mortgage provider is willing to lend. You will need to be able to prove your declared income with payslips or other official documents.
Traditionally the size of a mortgage is decided by applying a multiplier to income, for example if you earned £25,000 a year, a lender might multiply this figure by four (it’s rare to multiply income by more than five) to arrive at a mortgage offer of £100,000.
If your household has two incomes these are be typically be combined together in one of two ways.
- Add the lowest income on top of the highest after it has been multiplied. So if the highest income was £30,000 and the lowest was £20,000, the offer could be £140,000 (£30,000 x 4 + £20,000 = £140,000).
- Add both incomes together and use a lower multiplier figure. So for the same incomes this could result in an offer of £150,000 (£30,000 + £20,000 x 3 = £150,000).
Lenders tend to use whichever method results in the higher figure.
What are your outgoings?
Mortgage lenders will often also consider your outgoings when deciding how much to offer you. These include things like:
- Existing monthly repayments for loans and credit cards
- Childcare costs (or maintenance payments)
- Car tax and insurance
- Council tax and utility bills for the home you want to buy
- Insurance payments
Your credit score is very important in determining your eligibility for any form of borrowing, and mortgages are no exception. All providers will thoroughly examine your credit report and make their decision based on your score.
Checking your credit report is important before applying for a mortgage, as you can check for errors and correct any you may find. If you have a poor credit score you can also discover the cause and take steps to improve your credit score.