28 Jan 2016
Low interest rates are tempting more and more people to move up the the property ladder, or to step onto it for the first time.
With banks lending well, there is also great choice out there for buyers. How much can you borrow? That depends on a number of factors.
Here are the things you will need to consider.
Everyone has an idea of what their ideal home looks like, but it is important to be realistic about what you can afford before you start your search.
There is no point in looking at properties way above your price range if you are unlikely to get or even be able to afford a mortgage on it. If you are a first-time buyer, how big is your deposit and how much will you need to borrow? If you are moving, how much could your home sell for, how much equity do you have and how much more would you need to borrow?
When you apply for a mortgage, the lender must assess what level of mortgage payment you can afford, taking into account your personal expenses as well as your income. The amount you can borrow is now based on this affordability assessment rather than on a multiple of your income.
The lender must also look ahead and 'stress test' your ability to repay the mortgage. This includes taking into account the impact of future interest rate rises and expected changes to your lifestyle which you must tell them about. For example, redundancy or plans to have a baby or take a career break. The lender might restrict how much you can borrow if it looks as if you wouldn’t be able to afford the mortgage under these circumstances.
Although mortgage affordability calculations vary between lenders, they all look at the following expenses after taking into account your income:
They will also take into account the likely cost of monthly and annual bills such as:
They will also take into account estimates of your other living costs such as spending on clothes, recreation and childcare.
A mortgage calculator is useful to assist with working out how much you can afford to borrow and completion of a budget planner will assist with working out general affordability.
You also need to think about how you would meet your repayments if:
Mortgage repayments aren't the only cost to think about when buying a property. Some mortgages also come with arrangement and/or booking fees. These can be added to the loan, but will cost you more in the long run as you'll be paying interest on them.
You also need to factor in your deposit, legal and valuation fees, Land and Buildings Transaction Tax (LBTT) where the property purchase price is above a certain level, building insurance and removal costs.
Good protection cover is also extremely important especially for families and the cost of insurance should also be factored into your figures.
If you’re on a low income or have a small deposit there are several schemes available to help you get on the housing ladder for example:
Using an independent financial adviser can be extremely beneficial as they can help you through the whole application process and will know what type of applicants a lender will accept. They will also do the bulk of the paperwork, which can speed up the process.