So, you’ve decided to get on the property ladder and buy your own place. Congratulations – you’re about to embark on an exciting adventure!
But, before you start searching for your perfect pad, it’s time to ask yourself a vital question: Can I afford a mortgage?
The answer to this depends on lots of factors. For example, how big is your deposit? What monthly repayments can you afford? What are your usual monthly incomings and outgoings?
It’s also important to understand how interest rates work and find the right mortgage broker for you.
There’s a lot to consider and compare, and plenty of sums to do. But we’re here to help guide you every step of the way.
Mortgage calculator UK – how much can I borrow?
Struggling to work out how much you can afford to borrow?
This will calculate your monthly mortgage payments for after you buy a property.
Mortgage allowance – how to save for a deposit
Saving for a deposit is a big hurdle for many. Some first-time buyers need help to do so.
Here’s some advice on how to increase your savings:
- If you’re currently renting, could you move back in with your family while you save for you deposit?
- If you’re currently renting, and plan to continue to do so, can you downsize your current rental property?
- When trying to improve your chances of getting a mortgage, analyse your monthly payments vs. your income. Consider how much you spend and what you spend it on
- Budget wisely – reduce expenditure on luxuries and non-essentials. Even small savings made regularly can mount up and make a difference
- Set yourself a savings goal and calculate how you’ll achieve it each week or month
Mortgage providers all have different criteria, but the rule of thumb is that a large deposit means you’ll need to borrow less. The less you need to borrow, the lower your monthly repayments cost.
So, the size of your deposit matters!
The government can help you buy a home. For example, their Help to Buy scheme offers a range of measures to help first-time buyers, including a Help to Buy: ISA that can boost your savings by 25%. Note: this scheme closed in November 2019, but you can continue to save in it until November 2029 (if you opened an account before then).
Choose the best mortgage provider for you
If you want a mortgage, you’ll need to speak to a mortgage provider. They all have different methods of calculating who to lend to and how much they’re willing to lend.
The main factors will be: your income, your available deposit, your credit rating and your usual monthly expenditure. (If you’re making a joint application, these factors will be considered for you both.) If you’re self-employed, you’ll need details of any income tax you’ve paid.
Some mortgage providers specialise in catering to people with non-standard financial arrangements or poor credit ratings, who might have difficulty satisfying the more traditional terms of high street lenders. With 15% of the total UK workforce now consisting of the self-employed, entrepreneurs and contractors, this is a booming sector.
Additionally, some firms offer occupation-specific mortgage products. These lenders have developed mortgage application criteria better suited to people with, for example, atypical employment contracts or fluctuating income, enabling them to take out mortgages that they might otherwise not be able to.
It’s always worth researching to see if there’s a specialist mortgage provider for your sector.
Your monthly income vs. how much you spend
Mortgage lenders need to know that you can afford your potential mortgage repayments. So you’ll need to demonstrate that your monthly income outstrips your regular monthly expenditure.
Your income will typically be quite simple to prove. But how much do you really spend each month?
When analysing your regular outgoings, you’ll need to account for everything, including how much you spend on things like:
· Fuel for your car
· Train/bus/tube travel
· Supermarket shopping
· Day-to-day expenses e.g. coffee, snacks and sandwiches
· Trips to the cinema, gigs and sporting events
· Meals out in cafes and restaurants
· Drinks in pub and bars
· Music and technology
· Holidays, trips and weekends away
Before you apply for a mortgage, invest some time in reviewing your regular outgoings and identify potential savings. Seemingly small changes – like reducing takeaways and trips out – can really make a difference across a whole month.
Reining in your monthly outgoings could be the difference that makes it less likely you’ll get your mortgage declined.
Lower monthly repayments (and what to look out for)
You must be able to afford your mortgage monthly repayments. These payments will need to be made each month, every month, for the lifetime of the mortgage – traditionally 25 years.
However, times are changing and many lenders are starting to offer longer terms of up to 35 or even 40 years. Longer-period mortgages often only offer short-term benefits, in terms of lower monthly repayments, as the loan value is stretched over a much longer period of time.
But as data shows, they sometimes result in much larger overall payments in the long-term. In their example, borrowers would pay almost £33,000 more interest – £81,643 versus £48,882 – if they choose a 40-year term rather than 25, based on a £180,000 repayment mortgage at 2%.
As always, it’s important to consider the personal pros and cons of any financial arrangement.
A guide to loan to value (LTV) ratios
Your property’s LTV (Loan-To-Value) ratio will have a big effect on whether or not you are deemed able to afford a mortgage.
So what exactly is a LTV, how does it vary and how can you guard against it scuppering your dreams of owning your own home?
The LTV of a mortgage changes the interest rate charged by your lender. (Lenders charge more for a higher LTV, because that equates to less equity in the property, increasing their risk if property prices fall in the future.)
To calculate LTV, divide the value of the mortgage (say £160,000) by the value of the property (say £200,000). Multiply by 100 to get a percentage. (In this example, the LTV would be 80%.)
Different lenders offer different interest rates according to LTV, so be sure to compare offers.
If your LTV is close to a cut-off point to a better rate, try to increase your deposit. This may reduce the value of your mortgage, your LTV ratio and your monthly repayments.
How do interest rates work?
When saving, it’s a good idea to see if your finances would stand up to a stress test, e.g. if interest rates were to rise, could you still afford your repayments?
The world of interest rates can be daunting. There are hundreds of options, often dependent on your individual circumstances, the value of the loan and your attitude to risk.
Here’s a breakdown of how mortgages work:
What’s a fixed-rate mortgage?
Fixed-rate mortgages over a longer period of time often charge more interest. This is because you’re paying for the security of knowing that your payments won’t go up for the duration of the fixed-rate period.
What are the benefits and downsides of a lower-rate mortgage?
Lower-rate mortgages can look appealing, but might not last as long. So if rates rise, you’ll need to pay the increased rate when your short-term deal ends. Lower-rate offers can also come with large arrangement fees.
Is an interest-only mortgage a good idea?
Interest-only mortgages offer more affordable monthly repayments, but only for the short length of the mortgage. It’s important to be aware that the original debt still needs addressing when the deal comes to an end.
What if I overpay my mortgage?
If you can afford to and the terms of your mortgage allow you to without incurring any early repayment charges as a result, paying more than your required monthly repayments can help to reduce the term of your mortgage and your overall costs. This can be done via off-setting (using savings to reduce the debt borrowed) or paying-off some of the original debt entirely. Mortgage terms vary widely from lender to lender so be sure to check your mortgage terms or consult your lender before making any overpayments.
Which is the right mortgage for me?
Your current and future personal finances will play a large part in this decision. The greater your deposit, the higher your income, the lower your average outgoings, etc, – then you might find you get offered more favourable mortgage rates.
The type of mortgage you choose may depend on your knowledge of the market and your attitude to risk. You want a good deal. But you also want to sleep well at night. Attitudes towards financial security are very personal and different for everyone so seek independent advice if you’re finding it hard to decide.
But whatever the type of mortgage you’re looking at, always make sure you calculate all elements of an offer. Look beyond the headline rates to ensure you’re comparing total costs.
A good credit rating can help get you a mortgage
A good credit score can seriously boost your chances of securing an affordable mortgage.
When you apply for a mortgage a lender will contact a credit ratings agency to assess your application. Depending on various criteria – which vary according to each agency and mortgage lender – they will determine your eligibility for a mortgage.
Tips to increase your credit rating
An excellent rating should give you access to better mortgage deals, with improved loan-to-value options and low interest rates.
A poor rating may result in higher interest rates, difficult lending conditions, or even declined credit. How can you make sure this doesn’t happen?
- Register on the electoral roll to prove your identity
- Repay all credit on time and by at least the minimum required
- Don’t default – it stays on your credit report for six years!
- Stay within the credit limits
- Check all your personal information is correct on your credit report
- Get rid of any unused dormant accounts or credit cards
Repercussions for not paying your mortgage
There are very real consequences if you can’t keep up with your mortgage repayments – the worst being that your home may be repossessed.
Lenders offer different loan amounts using different affordability criteria – so be sure to check and double check the sums involved.
Looking for a home?
When looking for a home, researching your new area is essential. You’ll want to find out as much as possible, including information on local schools, crime rates and neighbourhood demographics. A property report can tell you all of this and more. Get your full report below.