Before you start looking for your dream home, you’ll need to know how much you’ll be able to borrow, so that you can tailor your search accordingly. When you’re applying for a mortgage, you’ll need to consider more than just affording the monthly repayments – generally, the size of the mortgage depends on three factors:
- The loan-to-value ratio (LTV)
- Your credit score
The LTV is the size of the deposit against the size of your loan – typically, the deposit needs to be at least ten per cent of the value of the house. It’s fairly simple to calculate an LTV; it’s the amount that you need to borrow, divided by the value of the property and multiplied by 100.
As a general rule of thumb, the higher the LTV, the higher the risk for the mortgage provider, which means the interest rates will increase. Conversely, that the larger the deposit that you can put down, the lower the size of your monthly repayments and the lower the interest rates.
Your credit score is an important determining factor for any type of borrowing, so mortgages are no different – it plays a big part in how much money you can borrow, as lenders will decide if it’s a risk worth taking. In some cases, a low credit score can mean that a mortgage lender won’t consider your application, but there are still options available – although they will tend to have higher-than-average interest rates and need larger deposits.
As mortgage providers will scrutinise your credit report before making a decision, you should always check it for errors first. Before applying for a mortgage, you should take steps to improve your credit rating and therefore your chances of getting a good deal.
Mortgage providers will analyse your financial circumstances before making their decision. Traditionally, lenders will multiply your income by a set figure – capped at four-and-a-half times your income – to work out the amount that you can borrow. For example, if your income is £25,000 a year, the lender could multiply it by four, to offer you a mortgage of £100,000.
They will also look at how much you will be able to afford to pay back each month, by analysing your personal and living expenses – such as bills, insurance or credit card repayments – as well as your income. They will ‘stress test’ your ability to repay it, by looking at potential life changes such as redundancy, or having a baby.
Applying for a mortgage can be time-consuming and complicated, so let us make it easy for you – get in touch with our mortgage experts.