How much can you afford when buying a property?

by Glenn Maxwell

Are you trying to find out how much you can borrow in the UK as a home buyer in the form of a mortgage? The first step would be to speak with an estate agent in Lee and explore the options of how much you can truly afford based on your financial situation. By consulting with estate agents you will also get a clear idea of how the lenders find out your affordability. 

 In today’s guide, we will discuss all mortgages: affordability such as how much one can borrow, how much one can afford, the amount one needs to deposit, etc. 

 Learn how much you can borrow

The amount of mortgage you can borrow in the UK is usually between 3 to 4.5 times your monthly income and at times it is 4 times if the lender is applying for the mortgage with someone else. Although some lenders may allow you to borrow more, it depends on the lender. 

 If you are trying to estimate how much money you can borrow in the UK, there are some steps that you can take: 

Using a mortgage borrowing calculator

Ever since the financial crash in 2008, money lenders have been stricter and more stringent about who they are lending the money to. Hence, they will calculate affordability checks on any borrower before they are loaning out any money so that they can ensure that their monthly repayments will be done without fail.  

Checking your credit score

The factor of affordability is done based on an in-depth study of one’s income, outgoings and the total debt. This process also scrutinises your credit file. 

Any lender will also check whether one can afford the repayments if the interest rates are going to increase by 4% more than the Bank of England’s base rate. This method of checking affordability is known as stress testing. 

Moreover, you might only be able to borrow the highest amount if you are a current account holder with the lender or you have a large deposit.  

Get hold of an agreement in principal 

To get a more accurate highest mortgage figure, one can also apply for an agreement in principle or AIP. Although AIP is not the same as a formal mortgage offer, it is still a theoretical figure that a lender might be willing to lend to a borrower. 

Almost no estate agent will take you seriously if you do not have an AIP. 

How much of a mortgage can one afford?

The amount of mortgage you can borrow and the mortgage you can afford is slightly different. Although a lender might be prepared to let you borrow a larger amount, you may want to opt for a smaller amount so that there are other things that you would want to do with your money. Before you borrow the highest amount, you must consider whether you will be able to afford the monthly repayments of such a huge mortgage. 

According to the general rule of the thumb, you would not want to spend more than 30% of the salary you take home every month on your monthly mortgage repayments. 

If you are spending more than that, you will be risking yourself to be ‘house poor’ wherein you will have a house but will not be left with any money for other important things such as building your savings, going on holidays and having hobbies. 

 When it comes to living in London, the price of houses is very high and one might find it very hard to keep up with the repayments being 30% of one’s income. 

Hence, it is crucial to work out the total cost of home ownership before moving ahead with the process. In case the mortgage payment and the household bills exceed 40 to 50%, it is better to get a smaller mortgage.  

How much deposit is required to get a mortgage?

Mostly, a minimum of 5% deposit is required to secure a mortgage which means one can avail of a 95% mortgage loan. The size of the loan against the value of the property is known as the loan-to-value ratio or LTV. Often a 9% loan is also referred to as a 95% LTV mortgage. 

However, if you can save more and offer a deposit of 10, 15, or 20%, it will significantly increase the chances of being accepted for less expensive mortgage products. This will help you not only in borrowing at a lesser rate of interest on the principal amount, but it will also be the ideal and most favourable situation for you.  

How much can one borrow without any deposit?

In case you need a 100% LTV mortgage where you are not able to make any deposit and need to borrow the entire amount, you will still be able to get a loan. However, your options of getting one will be more limited if you were to make a deposit of 5, 10, or 15%.

Borrowers need to keep in mind that no-deposit mortgages have a much higher rate of interest and it implies that one needs to pay a lot more money in the form of interest in the long term. This also increases the risk of falling into negative equity in case there is a fall in the price of houses and you end up owing more than the actual worth of the property.  

While many first-time homebuyers opt for 100% LTV mortgages, one can find much cheaper and better products if one can manage to save up a deposit of at least 5%. 

Bottom Line

The decision of buying a house and applying for a mortgage is pretty big, hence, it requires time and planning to be executed properly. Taking out a mortgage is another crucial task which needs to be carefully calculated to avoid any disasters in the long run. We hope with this guide you will find out how much you can afford as a mortgage and how much you should borrow from the lender. 

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