By Dan Rowden
Two of the most frequent questions I get from my clients looking to buy their first homes are: “How much can I borrow on a mortgage?” and “How much is that going to cost me on the monthly payment and what’s the interest rate?”
The answer to those two questions is always more complicated than it might initially seem. It depends on your own personal circumstances and three key things that the lenders are looking at. Ultimately those three things will lead to us knowing the best option for you, whether it’s a mainstream lender, whether it’s a more specialist lender, or anything in between.
Those three key areas are:
Firstly: how much deposit you have. What do I actually mean? When we’re talking about deposit, we’re referring to a percentage of the purchase price that you’re going to put down from your own savings, or it might be a gift from the bank of mom and dad, or a help to buy ISA, or whatever it might be. And that is essentially your stake that you are putting down in the property.
Deposits would normally be anything from 5% of the purchase price upwards. It’s always been the case that the more deposit you put down (up to 40% deposit) when you’re buying your own home to live in yourself, means more options and more suitable interest rates. So, keeping it very simple, if you had a house that you were looking to buy for £100,000, and you had a £10,000 deposit, that would be a 10% deposit obviously. And on the flip side to that, that would also be known as a 90% loan to value mortgage. You might hear the term loan to value banded around a bit. Essentially, it’s the mortgage percentage relative to the value of the house. So that’s the first thing, deposit. The more the better. Obviously easier said than done, but that’s always been the case.
Secondly: it’s your income, but not just your income, your outgoings as well. If you imagine it like a set of scales, you’ve got your income on one side, your outgoings on the other. It’s very hard these days to just say, “Well, I’m earning X, so what can I borrow on that?” because you might have someone with an average salary but with no outgoings whatsoever. Someone else might have a higher than average salary but they have a family, three children, two car loans, some credit card debt, et cetera. And it means that they can potentially in some cases borrow less than the person or the couple on the average salary because of their outgoings. Crucially, financial commitments are always important, things like credit cards, hire purchase, personal loans, whatever it might be.
And finally: credit score and credit history. Certainly with the mainstream lenders your credit score is important as is your credit history. With specialist lenders credit score not so important because they’re looking at it on a more case by case basis.
It’s those three things together, deposit, income and outgoings, and your credit score and history. Those three things will allow us to determine and answer those questions that we get asked frequently, “How much can I borrow on a mortgage?” And “How much is that going to cost me on the monthly payment and what’s the interest rate?”
If you’re interested in buying your first home or your second home, or even a buy-to-let, whatever it might be, just get in touch and as always we’ll be happy to help you.