When we’d like to own our own home, we may scan the internet for areas we like. Once we and see the price ranges of homes for sale in those neighborhoods, we have to ask ourselves, “How much can I afford to borrow in order to get a house in this neighbourhood?”
That’s a lot to think about, and the matter does require some serious thought. You have to consider the monthly payments that come attached to a mortgage. Lenders look closely at your income and monthly expenses. They, of course, want to feel comfortable in the knowledge that your financial situation is suitable to a loan, taking into consideration the possibility of a change in interest rates or other circumstances.
It’s a good idea for you to learn and to understand the methods lenders use to assess the amount of a loan they might offer. That will be helpful in helping you decide on a realistic mortgage that you can obtain and handle.
A good way to get some authoritative financial advice would be to talk to your potential lender. You can discuss your situation before actually going through the process of applying for a loan.
The former method used by lenders to determine the amount of a loan was based on a multiple of the borrower’s income. This figure is what lenders call a loan-to-income ratio. As an example, if your annual income was around £50,000, you would probably have been able to borrow approximately three to five times this amount. Therefore, you might be offered a mortgage of as much as £250,000.
These days, however, the lender usually caps a loan-to-income ratio at four and a half times the borrower’s income.
The use of a mortgage calculator will help you understand how much your monthly payments would be if interest rates should rise in the future. Taking into account your various personal and living expenses as well as your income, the lender will be able to better assess the monthly payments you can afford to make in order to maintain a healthy relationship with your lender. This is called an affordability assessment.
After a thorough review of the mortgage market in 2014, the Financial Conduct Authority determined that these changes in calculating loan-to-income ratio were necessary.
Another aspect is that the lender must look ahead. This is what is called a stress test of your ability to repay the mortgage as agreed. This method considers the possible effects a rise in interest rates or possible lifestyle changes that might affect your ability to repay your loan as agreed. Some of these might be:
- A new baby
- A career change
After reviewing all the available information, the lender may think any of the above-cited circumstances might indicate that you wouldn’t be able to afford your mortgage payments.
If you’re considering the purchase of a home, you might review some of the websites with regard to a mortgage tailored to fit your needs.
It is important for you to remember that comparison websites don’t always give you the same results, so it would be advisable for you to review a number of sites before deciding on a lender.
It would be wise, as well, for you to do a little research into the type of loan and all its aspects before moving ahead.
Your lender will take all your income into account, such as:
- Your basic income
- Income from pensions or investments.
- Income from child care or financial support from previous marriages.
- Any other income you might have, i.e. overtime, commissions or bonus payments.
- Income from a second job or from freelance work.
The lender will need to review your pay slips and bank statements as evidence of income.
If you’re self-employed, you must provide the following:
1. Bank statements
2. Business accounts
3. Details of income tax paid
You’ll also be required to provide information on your expenses.
It’s a good idea to check your credit report before applying for a mortgage. This will enable you to correct any mistakes. Your report will also alert you of any missed credit payments that may cause the lender to turn you away. The lender will consider:
- Credit card repayment
- Maintenance payments
- Insurance, i.e. building, contents, travel pets and life, etc.
- Your monthly expenses such as water, gas, electricity, telephone and broadband.
In addition, the lender might ask for estimates of your living costs such as clothing expenses, recreation as well as possible childcare.
The lender may also ask to see your recent bank statements as evidence of the figures you supply in your application.
Future changes that may impact your ability to repay your loan will be another consideration that your lender will assess. For example, the lender will take possible interest rate increases into account. A lender will take into account the possibility that your or your partner might lose income from lack of employment or illness. There is the possibility that you might have the additional expense of childbirth.
It is very important therefore, that you make every attempt to think ahead and plan ways to meet your payments. You could, for example, protect yourself from an unexpected loss of income by increasing your savings as much as possible. It is suggested that you maintain enough money in savings to cover all expenses including your mortgage payments.
In this way, you’ll not only have the greatest possibility of obtaining your mortgage as well as nurturing it in case of future difficulties.