The Basics
How much should I borrow?
You can typically borrow up to three and-a-half times the main earner’s income before tax, plus one times any second earner’s income, or alternatively two-and-a-half times their joint incomes (if this is larger). However, there are now numerous lenders who do not use the traditional income multiples above, instead rely on an ‘affordability’ calculation. This can often increase the borrowing amount available quite substantially.
Your lender may only count half of income such as overtime, commission or bonuses unless this is guaranteed. Lenders will reduce the amount they will lend if you have substantial outgoings such as other loan payments.
If you are getting advice, the adviser has a duty to take reasonable steps to ensure that you can afford a mortgage that he recommends. Whether or not you get advice, lenders are required to lend responsibly. This means that they should, based on things like your income, expenditure and other circumstances, consider whether you can keep up the mortgage repayments now and in the future; for example after an initial discount period comes to an end.
How much can I afford?
To work out how much you can afford, write down what money you have coming in and take away what you spend each month. Ignore any rent or other payments that would stop once you own your own home, but add in anything new that you may have to pay, such as buildings insurance, water rates or additional travel costs from your new home.
Don't overstretch your budget!
It may be tempting to borrow as much as possible when the initial cost is manageable, but you could get into difficulties and lose your home if you can’t keep up your repayments.
Budget for increased costs in future
If you take a variable rate mortgage be prepared for your monthly payments to go up when interest rates rise.
If you have a low initial fixed rate or a discounted mortgage, allow for the increased cost when your interest-rate deal comes to an end. Don’t forget to allow for the possibility that interest rates may have risen over this period as well.
If you have an interest-only mortgage which then converts to a repayment mortgage at a specified time, be prepared for a big jump in your monthly payments.
A lender or our mortgage adviser will provide you with a ‘key facts illustration’, which will help you to work out whether you can afford your mortgage in the future and if rates rise.
How long should the mortgage last?
The ‘standard’ term is 25 years, but there is no real reason for this number of years. You can choose a different term if it suits you and the lender agrees that you can afford it.
With a shorter term, you’ll have higher monthly payments but pay less in total (see table below).
With a longer term, you’ll pay less each month but more in total. Beware of making financial commitments that continue past your retirement age unless you’re sure you’ll be able to afford the payments.
Use the Key Facts Illustration to compare the total cost of a mortgage over different terms.
Example of how term alters the cost of a repayment mortgage if interest is 6% a year.
Mortgage Term in Years |
Monthly payment for a £100,000 loan |
Total amount you will repay including the amount borrowed |
10 |
£1,110 |
£133,200 |
15 |
£843 |
£151,740 |
20 |
£716 |
£171,840 |
25 |
£644 |
£193,200 |
30 |
£600 |
£216,000 |
Approvals in principle and credit checks
When shopping around for your mortgage, a lender or mortgage broker may offer to give you an ‘approval in principle (AIP)’ or a ‘mortgage promise’. This is a promise to lend you a given amount on certain terms and conditions. This can be helpful once you have narrowed down your search and are ready to make an offer to buy a property. The firm will usually do a credit search to provide an AIP and this will register on your credit file, so it might not be a good idea to get one if you are only in the early stages of shopping around. A high number of credit checks over a short period of time may cause problems when you actually apply for a mortgage, as they leave a ‘footprint’ on your file history.
There may be some products where the interest rate depends on your credit record. In this case a firm will do a ‘quotation search’ rather than a full ‘credit search’.
If all you want is an illustration to shop around for the best deal and you are not making an application you don’t usually need to agree to a credit check.
Review your mortgage
Every year your lender must send you a statement and this is a good opportunity to check your mortgage and consider any changes.
You should also review your mortgage whenever the period of a special deal - for example, a fixed or discounted interest rate - comes to an end.
Your annual statement
Use your annual statement to check that your mortgage details are as you would expect them to be. The statement will include:
- the date and amount of payments you have made during the year compared to those that were due, including payments for any tied products that you took out through the lender (for example, buildings insurance);
- the amount of interest you have been charged over the year;
- the balance of the loan still owed at the statement date;
- the term remaining on the mortgage;
- the cost of paying off the mortgage including any early repayment charges; and
- where early repayment charges apply, the date that they will stop.
If you have an interest-only mortgage (or part of your loan is on that basis), the statement should either give details of any savings scheme you have taken out through the lender or warn you that you should have some arrangement in place for repaying the mortgage at the end of its term.
Check that it is on track to do this.
