29 Apr 2015
Analysis: How to get a mortgage
Natalie Welsh, Independent Mortgage Adviser, looks at how a mortgage lending is determined, and how much deposit is needed to purchase a property.
Background to lending
Before applying for a mortgage, you’ll need to think about whether you can afford the payments or not. You may think you can, but mortgage providers will be looking at your income and outgoings for evidence you can keep up with repayments if interest rates rise, or your circumstances change.
In the past, mortgage lenders largely based the amount you could borrow on a multiple of your income. Now, they must also assess what level of monthly payments you can afford, after taking into account various personal and living expenses as well as your income. This is called an affordability assessment. These changes were brought into effect by the Financial Conduct Authority in 2014 following a comprehensive review of the mortgage market.
The lender must also look ahead and ‘stress test’ your ability to repay the mortgage. This takes into account the effect of potential interest rate rises and potential changes to your lifestyle.
It’s also very important to remember that your home may be repossessed if you do not keep up repayments on your mortgage.
Considerations for the lender
When working out how much you can afford to borrow, the lender will look at:
1. Your income
- Your basic income; and
- Any other earnings you have – for example, from overtime, commission or bonus payments or a second job or freelance work; and
- Income from your pension or investments; and
- Income in the form of child maintenance and financial support from ex-spouses.
2. Your outgoings
- Credit card repayments;
- Any other loans or credit agreements you may have;
- Maintenance payments;
- Bills such as Council Tax, water, gas, electricity, phone, broadband; and
- Insurance – building, contents, travel, pet, life, etc.
The lender may ask for estimates of your living costs such as spending on clothes, basic recreation and childcare. They might also ask to see some recent bank statements to back up the figures you supply.
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.
3. Future changes that might make an impact
The lender will assess whether you’d be able to pay your mortgage if:
- Interest rates increased;
- You or your partner lost their job;
- You couldn’t work because of illness; and
- Your lifestyle changed, such as having a baby or a career break.
Deposits
Some lenders will offer to lend with as small a deposit as 5% of the lower of the purchase price or the valuation of the property.
Interest rates
Normally the lenders will charge a higher rate of interest for this level of borrowing. The reason for this is because of the higher risk to the lender. If for some reason you do not pay your mortgage payments, the Lender may be forced to repossess the property from you and your deposit may not cover the cost of repossessing the property.
At this level of borrowing the lenders will scrutinise a mortgage application more carefully so not everyone will be able to get a 95% mortgage approved.
Minimum deposits
Some lenders insist on a minimum deposit of 10% so that there is a greater chance in the event of repossession that their costs will be covered. In return for you paying a larger deposit, the lenders will offer a lower rate of interest.
The greater the deposit that you can pay towards the property, i.e. 15%, 20% or 25%, the lower the interest rate the lender will offer you.
It will generally be easier for your mortgage borrowing to be approved with a larger deposit. The deposit usually cannot be borrowed from another lending institution and must come from your savings or as a gift from a next of kin family member. If the deposit is a gift from a family member it means that is does not have to be repaid to them nor will they have any financial interest in the property.
Conclusion
From all of the above you will see how important it is to seek independent professional mortgage advice as early as possible. An expert will be able to discuss these points in further and give advice on mortgages that suit your particular needs.
To find out how much you can borrow, use our Mortgage Calculator here.