03 Jan How much can I borrow on a mortgage
A question we hear a lot is: “how much can I borrow on a mortgage?”. Well. when applying for a mortgage, you need to think about more than just whether you can afford the monthly repayments.
HOW LENDERS ASSESS WHAT YOU CAN AFFORD
Not so long ago, mortgage lenders based the amount you could borrow on a multiple of your income.
For example, if your annual income was £40,000, you might have been able to borrow four to five times this amount, giving you a mortgage of up to £200,000.
Today, when you apply for a mortgage, the lender will usually cap your mortgage at four-and-a-half times your income.
They also assess what level of monthly payments you can afford, after considering personal and living expenses as well as your income. This is called an affordability assessment.
The lender must also look ahead and ‘stress test’ your ability to repay the mortgage.
This considers the effect of possible interest rate rises and possible changes to your lifestyle, such as:
- having a baby, or
- taking a career break
If the lender thinks you won’t be able to afford your mortgage payments, they might limit how much you can borrow. You need to think about more than just whether you can afford the monthly repayments.
WHAT THE LENDER TAKES INTO ACCOUNT
When working out how much you can afford to borrow, the lender will look at:
- your basic income
- other earnings you have – for example, overtime, commission or bonus payments or a second job
They may even take account of things like:
- income from pension or investments
- income in the form of child maintenance and financial support from ex-spouses
You will need to provide pay slips and bank statements as evidence of your income.
If you’re self-employed you’ll need to provide:
- bank statements
- tax assessments
- tax payment summaries
Check your credit report. It’s a good idea to check your credit report before applying for a mortgage.
This will give you time to correct any mistakes in it and will notify you of any missed credit payments that could make the mortgage lender turn you down.
The lender might ask for estimates of your living costs such as childcare.
They will probably ask to see recent bank statements to back up the figures you supply.