Following an extensive review of the mortgage market, particularly in light of the 2008 property crash, the Financial Conduct Authority made some important changes to mortgage lending criteria in 2014, to help introduce a climate of responsible lending.
It was previous good practice to mainly consider a borrower's Loan to Income Ratio, but new guidelines stress the importance of also considering a household's outgoings. Two households could have very similar incomes with one being a single individual with no ties and frugal personal expenditure while the other could be a family with several children and heavy outgoings.
Up until recently, lenders generally calculated the amount they would lend you based on your income multiplied by anything from three to five times. So, if your total household income amounted to £35,000, you could be considered for a mortgage of at least £105,000 to as much as £175,000. But could you actually afford that?
The loan to income ratio has now been capped at 4.5 times the annual salary, but the affordability criterion must also be satisfied.
When you come to Cailean Mortgages for mortgage advice, we will take all this into consideration. The initial question we will discuss is, "What level of mortgage will a lender consider awarding you"?
This is relatively simple to work out and the principles hold valid for any type of loan or credit you may consider taking on during your lifetime.
The first thing we need to calculate is your monthly disposable income - the difference between your earnings and your expenditure. Here, you need to be entirely honest with yourself. Do you currently spend a princely portion of your salary on clothes, a beauty or fitness regime and going out every other night? If so, do you have every intention of cutting back on these expenses if need be, so that you can afford the home - and thus, mortgage - that you require? Do you have a sizeable deposit? A 10% deposit is considered the norm, although it goes without saying that the larger your deposit, the smaller the mortgage and, thus, the less you need to pay back, or the shorter the repayment term.
There are, however, various fees associated with a mortgage that we will also take into account when offering you mortgage advice: the lender may charge an arrangement fee, generally around £1,000; there are solicitors' fees; removal fees; and so on.
Your Household Income
This will depend on how many people in the household will be contributing to the mortgage repayments. Are you buying a property on your own? Are you a couple, or a few good friends as is becoming more common, joining forces to buy?
In any case, the household income will be composed of:
- income from a pension or any investments you may have
- overtime / bonuses / jobs other than your main employment
- maintenance or other forms of financial support from an ex-partner.
However, benefits such as Child Benefit are not always taken into consideration - some lenders do, some lenders don't.
In all cases, you will be asked to provide proof of earnings. These will include pay slips and bank statements.
Your Household Outgoings
These are likely to be more numerous than income and you must list them rigorously. There's no use trying to pretend you spend less than you do in reality, only to come a cropper and lose your lovely new home if interest rates shoot up!
Outgoings will include not only household expenditure, eg., utilities, but also personal expenditure such as clothing and holidays:
- Utilities - gas, electricity, water (where applicable), phone / broadband, mobile phone
- Credit card payments
- Any other credits / loans such as car finance
- Insurance - car, life, pet, contents - and remember, if you're currently renting, you'll only be paying contents insurance whereas you will also require buildings insurance as the owner of a property
- Maintenance for any children from a previous relationship
- Household and clothing
- Recreational activities.
Again, bank and credit card statements will be required in order to verify your monthly outgoings.
A responsible lender will also take into consideration future potential changes in your lifestyle. Depending on your age, these could include:
- serious and/or prolonged illness
- having a baby
- being made redundant
- a rise in interest rates.
If the difference between your income and outgoings is very tight, a lender may be tempted to restrict the level of your borrowing as any of these changes could tip you over the edge between paying off your mortgage comfortably and struggling to keep up with payments.
Do you have savings for any such event? Or enough disposable income left over every month to build up a float?
Buying a property is a serious investment and we at Cailean Mortgages will always offer you sound, impartial financial advice, tailor-made to your individual circumstances. Let Cailean take the stresses and strains out of your search for a mortgage anywhere in the UK!