The first step for first-time buyers is no longer about choosing a mortgage that’s right for you. It’s about ensuring that you’ll even be chosen for a loan by a lender at a rate that is affordable. Prior to the 2007 credit crunch, you could borrow even more than the value of the property! Nowadays the criteria required to obtain a mortgage has increased significantly as a direct result of the reckless lending being practised pre-2007. As a result, the Government has launched a range of schemes such as Help to Buy to push lenders to offer more.
What will they lend to you?
On average lending multiples are 4.5x your taxable income per annum, however, some lenders can go up to 5x your income. However, it is important to note that the smaller the deposit the higher the interest rate which means higher monthly payments, so you need to ask yourself if you can afford this from your monthly disposable income?
In the past, lenders simply multiplied your income to work out how much to lend you, they would even lend up to 6x your income. Now affordability is key, lenders will look at your income compared to your outgoings (debts and bills) and work out how much disposable income you have each month. Lenders will also factor in all your credit card and loan repayments. Even once they’ve done the maths, they may want you to have a cushion in the event mortgage rates rise, and to ensure you’re not right on the edge of your finances. As a result, lenders may ‘stress test’ you on a higher mortgage rate, typically between 5-5.5%, to determine if you can still afford to repay. However, if you can evidence all of your spendings they may not stress test you at the higher rate.
Can you really afford a mortgage?
The key takeaway is to make sure you can afford the house. Think carefully about whether you can afford the mortgage repayments? What would happen if interest rates went up? I would recommend using our budgeting tool which you can download HERE. For further assistance complete this enquiry form and a member of the Arne Grey mortgage team will get in touch with you to discuss further.