Wanting to buy a property is a dream for many people. To turn that dream into reality, it makes sense to ask which type of credit will be available to you. The more you know and understand about home loans and their affordability, the easier it will be to work out which one could be right for you.
What mortgage can I get?
This is the question that comes top of many people’s lists. There are two basic kinds of products to look for:
A repayment mortgage – this is where the capital is gradually paid off alongside the interest
An interest-only mortgage – this is where you only pay the interest for the duration of the term; this requires you to arrange to find the cash to pay off the principal amount you borrowed once the term ends
Most people will choose a repayment home loan, as it means the amount owed gradually reduces – more quickly in the latter years. It means you won’t need to worry about finding the funds to pay off the capital, since it is gradually paid off throughout the term.
The loan you can get will depend on your income and your outgoings. Lenders used to calculate the amount they would lend you based on your income alone. Following the MMR developments, your ability to afford to pay for your property is also now considered. This is designed to make sure there is less chance of you defaulting on the loan and losing your home.
Put simply, the higher your outgoings are each month, the lower the sum offered is likely to be. If you can reduce your outgoings before applying, you will open the way to a better offer.
Finding mortgages when self employed
Finding a loan is challenging enough when you are in steady employment. If you are self-employed, you will likely come up against some additional hurdles to get over:
You must have been in business for three years or more to get the best deals, although some lenders will allow you to be trading for less than this and if you find yourself in this scenario you would be best to speak to your broker to ensure your scenario fits with the lenders criteria.
You should be able to present a minimum of two years’ worth of accounts, or tax returns completed under self-assessment
This information is used to help prove your income. Self-certification loans were allowed prior to 2011 but were subsequently banned by the Financial Conduct Authority (FCA).
Some lenders are more amenable to self-employed people than others. Finding a broker to assist you in locating the best deal and lender can be very useful. Their knowledge will assist in navigating the ins and outs of finding loans when self-employed.
Mortgages: What can I afford?
Your situation will be personal to you. The best way to begin is by making a note of your salary or earnings per year. Jot down bonuses and overtime as a separate figure. Regular income will be counted when lenders calculate what they may offer you. For bonuses, overtime payments, and other occasional earnings, they may work out an average of the payments you have received over a couple of years. They may then only use a percentage of that to ensure they do not lend you more than you could afford to pay back. This is useful to know – it means you won’t make the mistake of counting your total monthly income when figuring out how much you could borrow if you earn a bonus each month.
You should also note down all your outgoings. These will be used to calculate the affordability of certain products. To put it simply, someone earning £40,000 per year with outgoings of £10,000 a year would likely be offered a bigger advance than someone on the same income with outgoings of £20,000 a year.
Using a home loan calculator will also help you work out what you may be offered. However, you should remember this is only a guide.
Which mortgage calculator should I use?
Most banks and building societies will have a loan payment calculator on their website. This enables you to plug in some figures to see how much you might be able to borrow. You could also visit price comparison sites or other official sites dealing in these financial topics. Some calculators are more complex than others, so find one that suits you. An easy calculator should suffice if you just want a quick idea of what you might be able to borrow.
How a mortgage calculator works
These calculators come in many different types:
A home affordability calculator allows you to find out what you might borrow by considering your income and in some cases your monthly outgoings.
A cost calculator shows you what your likely monthly costs would be in various scenarios
Rate change calculators show you how much more you might pay if interest rates increase (these are ideal for existing customers and those who are thinking of applying)
Overpayment calculators show you how much sooner you could repay your loan if you overpaid each month; they also show the effect on savings over the term given
All these calculators have their uses, but the first two will doubtless be the best ones to focus on when you are looking to apply for the first time.
Does a mortgage calculator include the deposit?
It depends on the calculator you use. Some allow you to enter the percentage of the property price you are prepared to put down as a deposit and will work out the figures from there. This is the best type of calculator to use, because it will show you how the size of a deposit will affect the amount you need to borrow and the monthly repayments.
What mortgage can I afford: UK mortgage possibilities
Your income is the key to figuring out what you can afford in the UK today. The basic starting point is for a lender to use a multiple to find out the maximum amount they would be prepared to lend you. This multiple is very unlikely to be any more than 4.5 times your income – and that applies to your regular income. If you receive, say, £2,000 income a month, plus between £200 and £600 in bonuses, those bonuses would be considered separately, as we described earlier.
However, affordability is now considered too, so your outgoings play just as vital a role as your income. This means there is far less likely to be any concerns about whether you could afford to pay back your loaned amount further down the line.
In theory, the loan you can afford will be the one you are offered by a bank or building society. They will look at various factors when determining what you can afford to pay back each month. That’s why it is best to reduce your outgoings as much as possible, pay off any debts you might have, and to get yourself in a good financial position prior to making an official application. It may well result in more possibilities for you to choose from.
What mortgage can I get: UK mortgages in review
A repayment home loan is by far the best choice for the reasons given previously. However, there are other elements to consider as well:
Fixed rate – this allows you to enjoy a fixed rate for a certain number of years, i.e. two, three, five, or 10 years. It protects against the chance of interest rate rises, although you will pay slightly higher rates for the privilege of fixing them.
Variable rate – this means the rate you pay could go up if interest rates go up, and usually very soon afterwards. They provide less certainty but usually offer lower rates than the fixed rate alternatives.
Tracker – the name comes from the fact the product tracks another interest rate. Typically, this will be the base rate chosen by the Bank of England. If that rate rises or falls, the tracker will adjust accordingly.
Which mortgage should I get?
Notice this question is slightly different to the one above. The one you can get may not be the same as the one you should get. The best example of this is getting a cashback deal where an amount of cash is given back to you. While this is appealing when buying your own property, it is quite often offset by paying a higher rate of interest over the life of the deal. If you forego the cashback element, you may find a suitable deal for the same amount that has a lower monthly interest rate.
Perhaps the easiest answer is that the product you should get is one you can comfortably afford. If interest rates increase, your payments will increase if you are on a variable rate deal. A fixed rate deal won’t see any changes, although when the term ends you will still be affected by the increase in rates.