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Understanding mortgages
Understanding mortgages

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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.

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Figure 1

Before making a mortgage offer your lender will:

  • Check your credit file and your credit score 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 the lender (not you!) thinks 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, school fees, and home insurance) rather than one-off discretionary spending. They will also take into account the number of dependents you have.
  • 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 3% 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 to your lender:

  • Check your credit files and ensure that there is no incorrect information. A link is provided at the end of this course to help you do this.
  • Ensure that the income details provided include those of your partner if you are both to be parties to the mortgage contract.
  • 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). This will improve the outcome of the affordability test.
  • Be careful about your job status when applying. If you are on a temporary contract or even on a probationary period for a permanent contract this may count against you when the lender assesses your financial position.
  • Think about the term of the mortgage. Typically, the first time people take out a mortgage the repayment term is 25 years. But if you stretch this to, say, 30 years, the annual cost will be lower – although the total amount you eventually pay in interest will be higher given the extended term. Additionally, a longer term may stretch into your planned retirement at which point you are likely to have a lower income to cover mortgage repayments.
  • Be prepared to approach more than one lender. The affordability tests do vary from one lender to another thereby impacting the size of mortgage you could obtain.
  • 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 course.)
  • 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.

The next step is to present your chosen lender with details of the property you want to buy.