A question that seems to have gone unanswered on the internet, is how do mortgages work in the UK? And I’m going to talk specifically about residential mortgages, so that’s a home that you’re going to live in.
Using your Income to Assess Affordability
Now, the first thing that you’re going to need is you’re going to need to have an income, and in taking that income, the mortgage lender is going to work out your affordability. And that means that they’re looking at not only your income but what your regular expenditure is going to be. Now, if you’re a first-time buyer, they’re going to make some estimations on things like council tax, gas, water, electric, telephone, and they’re the utility bills. But they’re going to assess for everybody any committed payments that you have: things like loans, credit cards, travel expenses if you’ve got consistent train fares, for example. Maintenance payments, PCPs on cars or hire purchase on cars or even lease payments. Anything that you’ve got committed to pay out. Might even be a sofa. They are going to take that all into account, and they’re going to work out how much you can borrow.
For example, if you’ve got a salary that pays you into your bank £2,000 per month, and your living expenditure is going to be £1,000 per month including any committed expenditures, then that’s going to leave you with £1,000 disposable income. Now, your mortgage payment is going to have to fit within that amount, plus a little bit extra for a buffer, so it might be below £800. But the mortgage lender can normally work on the premise of saying £25,000 a year, if we were to times that by something like four to four and a half times, then that means that we’re going to be able to, or you’re going to be able to get a mortgage somewhere in the region of about £100,000 to £112,000. Now, if you’ve got a shorter mortgage term, i.e. you’re not going for something like 25 years, that could reduce the amount that you can borrow.
If you’ve got a high car payment and credit cards, then that could reduce the amount that you can borrow. So working out affordability is not a quick and simple and easy thing to do. And to make things more tricky, every single bank and mortgage lender has a different way of calculating affordability. If you’ve got children, that’s going to have more of an impact on a single individual. If you’ve got two people applying, then that’s going to enable you to potentially borrow more because you’ve got two incomes that can count towards it. I’ve got three kids, and it has quite a significant impact on the amount that I can potentially borrow.
Now once you’ve got your income, and you know realistically how much you can borrow, you’re then going to need to work out your deposit. And the deposit works on as a minimum, you need to have at least five percent of the property’s value. And that’s going to open a select and small number of lenders available to you. My personal preference and recommendation is that you really aim and shoot for a 10% deposit because it makes more lenders available to you. It’s going to see the interest rates dropping quite considerably because there are more lenders available, so there’s more competition. And equally, it could make it easier for you to borrow as well. So shoot for the 10% if you can.
Costs of Buying
Once you’ve got your income, once you’ve got your deposit, you’re going to need to have some costs of buying. And that’s going to be things like solicitor’s fees, stamp duty, which is the tax payable to the local government. You’re going to need to have a cost for evaluation or a survey on the property to confirm that it is structurally sound and it is the amount that you’re buying for. And I’ve done a previous video on the different types of surveys that are available. You’re also going to need to have some money available for fees, so things like the lender may charge a fee for the cheapest and lowest possible interest rate in the marketplace, which might not be the most suitable, so again, that’s where an advisor can help you. Then you’re going to need to have some money available for broker fees: someone like myself who arranges the mortgage for you, depending on your circumstances, may charge you a fee.
You’re going to need an income, you’re going to need a deposit, and you’re going to need some extra money for fees. All of that is easy to work out as a mortgage professional, but to you as somebody looking for a mortgage if that sounds scary and daunting, but you want to buy in the next 12 to 24 months, you really need to speak to an advisor as soon as possible, so that you can then start to action your plan and you can start to get all your ducks in a row and start to get things in order so you know where you are income-wise, where you are in terms of your deposit, and what the costs are going to be for you to buy.
If that’s helped, then please do let me know, otherwise, I’ll see you again soon on the next Article.