How much are you allowed to borrow?
The amount you can borrow varies between lenders, but it’s based upon the following factors:
1. Your earnings
Typically, a mortgage lender will agree to a loan amount that’s 3 times your annual earnings. However, if you’re buying the property with someone else, typical variations can include:
i. 2.5 times the amount of both annual incomes
ii. 3 to 3.5 times the amount of the greater income, plus the equivalent amount of one year’s earnings from the second income.
An important point to remember is that the amount you can borrow is not necessarily the amount you can afford to pay back. Some mortgage lenders require details of your outgoings as well as your income in order to assess whether you can afford to pay back the loan.
If you’re a first-time buyer, it will help your application if you can prove that you’ve been paying rent for a similar amount to the required mortgage repayments.
2. The value of the property you wish to buy
This is known as the loan-to-value ratio; most lenders will loan up to 75% of the property’s value. Some lenders will loan 100% of the property’s value, but this isn’t an advisable option.
With a 100% mortgage, you’ll eventually pay back much more than with a lower loan-to-value ratio. You may also have to pay for Mortgage Indemnity Insurance, which can send costs spiralling.
It’s often compulsory that you take out Mortgage Indemnity Insurance if the loan-to-value ratio of your mortgage is above 95%.
Mortgage Indemnity Insurance protects the lender – not you. If you can’t afford your mortgage repayments and your house is repossessed and sold for less than is still owed on the mortgage, the lender can claim compensation for the loss.
Mortgage lenders can chase you for payment of this debt up to 12 years later.
You can avoid paying for Mortgage Indemnity Insurance by checking which loan-to-value level it becomes compulsory with. Then simply arrange to borrow an amount just below the threshold.
Another point to bear in mind is that mortgage lenders may refuse your application if, for example, they believe the property hasn’t been valued appropriately. For example, if they judge the house price too expensive, or cheap, for the area.
