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MSE’s Academy of Money
MSE’s Academy of Money

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1 Getting a mortgage: how much can I borrow?

Before making an offer to buy a property you need to know how much your lender will be prepared to advance you and on what terms. Getting at least an indication of what you can borrow makes sense before you make an offer. Subsequently you can return with details of the specific property you want to buy.

This is a photo of a house with a ‘For Sale’ sign outside.
Figure 1 Will your mortgage be enough to secure that property purchase?

Before making a mortgage offer your lender will:

  • Check your credit report to ensure you’re financially attractive. Lenders are very interested in your track record when paying back any money you have previously borrowed.
  • Assess the amount of money they (not you!) think you can afford to pay back (the ‘affordability test’). This involves the lender reviewing your income and spending – typically aided by studying your bank statements for the past three months. When it comes to your spending the focus will be on your regular and contractual expenditure (e.g. mobile phone contract, subscription services and home insurance) rather than one-off discretionary spending. They will also take into account the number of dependents you have. This could include not only your children (depending on their age) but also your parents or partner, depending on their circumstances. The current norm is that you’ll be limited to borrowing around four times your salary.
  • Stress test your finances. This includes looking at the factors that could change the amount you spend each month, and seeing if your budget can cope with the interest rate on your mortgage rising sharply (normally by assessing the impact of a 1 to 3 percentage point hike in the mortgage rate you pay).

So ahead of talking to your lender, there are some things you should do to help present your best financial profile:

  • Check your credit reports at each of the three credit rating agencies to make sure there is no incorrect information. A link is provided at the end of this session to help you do this.
  • Make sure you provide both your income and your partner’s income details (if you are getting a joint mortgage).
  • Review your spending – ideally at least three months before approaching your lender and, perhaps, cut out some non-essential regular spending (for example gym membership if you are not making use of this and unused subscription services). This will improve the outcome of the affordability test.
  • Consider using a mortgage advisor (also known as a broker) to help with your application for your choice of mortgage. The advisor’s expertise can help – particularly if you are a first-time buyer. Do, though, check that their advice covers the whole mortgage market (as opposed to the products provided by a few lenders). And check the fee payable – typically this is around £500 or a small percentage (less than 1%) of the sum you want to borrow.
  • Know your job status has an influence on a lender’s decision. Some lenders are wary about lending to borrowers who are on a temporary contract or in a probationary period for a permanent contract. The self-employed, freelancers, zero-hours contract workers and gig economy workers are further examples of those who can find it more difficult to get accepted by a lender. A mortgage broker will be able to help you find lenders who are more willing to lend in these circumstances.
  • Think about the term of the mortgage. Typically, the first time people take out a mortgage they set a 25 year repayment term – although some lenders let you borrow for longer periods of up to 40 years. You can borrow for longer though. This will mean your repayments are lower, as you’re paying less each year, although the total amount you eventually pay in interest will be higher, as you’re borrowing for a much longer period. Remember, though, that a longer term may stretch into your planned retirement at which point you are likely to have a lower income to cover mortgage repayments.
  • Make sure you are aware of the costs involved in completing the purchase of your property – like legal and removal costs, as well as any fees payable to secure a mortgage. (This is covered in more detail later in the session.)

Note that when interest rates are higher – as they have been in the last two years – lenders are sometimes inclined to let you borrow less than if interest rates were lower. This makes it even more important to do this preparatory work.

The next step is to present your chosen lender (either directly or through a broker) with details of the property you want to buy.