So this blog is going to summarize the four key areas that will ultimately dictate what you can borrow on a mortgage as a maximum. It’s not to say that you’d necessarily need to borrow the maximum amount, but it just gives you a budget alongside your deposit. So if you know that you’ve got X amount as a deposit and you can borrow Y on a mortgage, obviously that allows you then to look at the market and say, “Right, okay, well, I know I can afford that house or that flat.”
So as a starting point, number one is your income, obviously. The lenders will always need proof of income whether you are self-employed (as a sole trader or a partnership), a limited company director or employed. There’s a lot of nuance and a lot of detail, but in short, as an employee, typically the last three months payslips and the last three months bank statements are what is required by the lenders. So we would ask for that as well. If you are a self-employed sole trader, the last three months business bank statements, plus the last two years (or however many you have) worth of trading accounts are required, and that’s the same really for a limited company director. Now I won’t go into the details of how the lenders assess it, but as far as we are concerned, we need to see that proof of income right up front, because obviously it’s crucial. So that’s number one.
Secondly, outgoings. So when I say ‘outgoings’, the lenders are looking at your normal living costs (e.g. food, utilities, childcare) but also your fixed expenditure. For example, credit card debts, personal loans, student loans, higher purchase for your car, buy now, pay later finance for your sofa, or whatever it might be. Typically, for obvious reasons most first-time buyers don’t have a great deal of fixed expenditure outside of perhaps a student loan and maybe some credit cards, but it’s always important for us to get a full breakdown of that alongside your living costs. Most lenders will use the Office for National Statistics’ data for average living costs. For example, they know that a three bedroom semi-detached house in Taunton is going to be X amount for water, Y amount for council tax, et cetera. So generally that’s slightly less important. Although if there is something unusual, we do need to know. The key thing is your fixed expenditure. So that’s outgoings.
Thirdly, it’s your credit history because obviously your income and your outgoings are crucial, and that’s the most important thing. However, if someone has a poor credit history, the reality is that they will get less on a mortgage than someone who has a good clean credit history. Again, there’s always nuance. There are always variations, but as a general rule of thumb, that is something to bear in mind. If you are aware of any missed payments, County Court judgments, defaults, whatever it might be, we need to know that. So again, we would be looking for a credit report in that scenario to see what is showing because the devil is in the detail when it comes to credit. And ultimately that is an important factor in determining what the maximum mortgage will be.
And finally, it’s how much deposit that you have as a percentage of the purchase price. So in short, if someone has, for example, a 10% deposit on a purchase price because the mortgage is 90% of the value of that property, it’s a higher risk mortgage to that lender than if somebody in the same example had a 20% deposit. So because of that high level of risk to the lender with a smaller deposit, it means that the lender will likely lend less money to that particular client. Again, that’s just something to bear in mind. It has less bearing them the income, outgoings and credit, but it’s important to remember that if you think you can borrow X on a mortgage with a 10% deposit, and then something changes and you can actually get a 15% deposit, we will recalculate the figures because it might mean that you can get a bit more borrowing on the mortgage since it’s lower risk to the lender.
So that’s it basically. As a quick summary, the four key areas that can affect the maximum size of your mortgage are: income, outgoings, credit score/credit history, and deposit. These are the areas that we will ultimately be digging into. And then we can come back to you and say, “right, we are confident that you can get a mortgage of up to this figure and we know that your deposit is this figure made up from savings, the bank of mum and dad, whatever it might be. So you can realistically go and have a look on Rightmove and the estate agents and everything else, and try and find a property within this budget and you’re off and running.”
Hopefully that helps.