Banks and building societies used to base mortgage calculations on one thing only: your income.
These days, they look at a whole lot more to make sure you can repay their loan. And that mainly focuses on your outgoings.
What mortgage can I afford with my salary?
Generally, banks and building societies will lend between 4 and 4.5 times your total household income.
They mainly look at your salary to work this out, though some lenders will also consider overtime, bonuses and commission.
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What lenders will consider before approving your mortgage
Your essential outgoings
This includes all the bills you need to pay like gas, electricity, water and council tax.
But it also includes all the other essential things you need to cover, like travel and commuting costs, school fees, childcare and food.
Next, they’ll move onto the fun stuff you like to spend money on. This will be things like holidays, entertainment, shopping, eating out and gym memberships.
Lenders will look at what you’ve been spending your cash on for the three to six months leading up to a mortgage application. So it’s worth getting your accounts in order well in advance of applying.
They want to make sure that you can still afford your mortgage repayments while continuing your current lifestyle.
Planning on extending the family any time soon? Lenders will even look into what your future outgoings might be.
So if you’re pregnant or have young children, your lender needs to be sure you can afford that future childcare on top of your current outgoings.
The bigger the amount you’ve managed to squirrel away to buy your new place, the more favourably a lender will look upon you.
Borrowers with large deposits are seen as lower risk. And lenders like lower risk.
They’re much more likely to offer you a bigger loan if you’re borrowing a smaller proportion of your property’s value.
Your age also plays a role in how big a mortgage you can get.
Lenders want to be sure that you can repay what you’ve borrowed before you retire.
They’re less likely to lend higher sums to people who are nearing retirement, as your monthly income usually goes down when you’re no longer working.
Your credit score
Lenders will check your credit score to decide whether or not you are eligible to borrow money.
You can check your own with any of these credit reference agencies (CRAs):
Credit reference agencies gather information about your credit history and use it to build your credit report. Then, they calculate your score.
Do bear in mind that not all lenders report to every CRA to enquire about your credit history. This can mean that one CRA might have information about your credit history that another doesn’t. So there can be discrepancies between their ratings.
Regularly checking your credit report for errors can help to avoid this.
Work out your monthly mortgage repayments
Work out what you'll pay each month with our mortgage calculator.
Just input some basic info like the price of the property you want to buy, the interest rate and the term of the mortgage.
It'll give you an idea of what size deposit you'll need to aim for and how much you'll repay each month.
The types of mortgages available
Interest rates are charged by mortgage lenders throughout the duration of the mortgage.
They vary according to the type of mortgage you take out. And lenders want to make sure that you can still pay them back if the interest rate changes.
Let’s look at what this means and the different types of mortgage available.
Standard variable rate mortgages
Banks and building societies generally set their own standard variable rates. And they are often the most expensive mortgages available.
Right now, the best fixed rate mortgage deals for first time buyers are around 5.3%, according to Moneyfacts.
In contrast, the standard variable rate (SVR) for lenders is ranging between 6.5% and 8.5%.
That said, there are discounted standard variable rates available which are around 5.9%.
If your mortgage moves over to the standard variable rate at the end of your deal, as many do, your outgoings will suddenly increase.
And because it’s a variable rate, your lender can also change the SVR at any time.
It’s often much better to search for another mortgage deal when your one ends, than to put up with paying the standard variable rate.
Tracker mortgages 'track' the Bank of England base rate, which is currently 4%, but they are usually set higher than the base rate.
So you might pay the base rate plus 3% for example, making your mortgage interest rate 7%.
Tracker mortgages, like many mortgages, usually have an introductory deal period that lasts around two years.
After that, you'd move onto the mortgage provider's standard variable rate.
Fixed rate mortgages
Fixed-rate mortgages are a popular choice because the interest rate is guaranteed to stay the same for the length of the deal.
That means you’ll know exactly how much you’ll need to repay each month, regardless of what happens to interest rates.
Lenders call this short-term special rate an 'incentive period' and it can be fixed for one, two, three, five, 10 or even 15 years.
The interest rates on fixed rate mortgages tend to go up the longer you fix them for. But for the peace of mind they offer, if you can get a good rate, they can be worth doing.
Two-year fixed rate mortgages are currently available for 3.49% if you have an LTV of 60% or less.
For an LTV of 70%, deals are available for 5%.
A discount mortgage is where the interest rate is pegged at a set amount below the lender’s standard variable rate (SVR).
They can be set for a period of say, two or five years, or for the whole term of the mortgage.
Discount rate mortgages are currently available for around 3.49%, according to Moneyfacts, making them an attractive proposition right now.
But do bear in mind that as with variable-rate mortgages, discount mortgage repayments could change from month to month.
So, there’s a lot to consider when working out how much you can afford to borrow with a mortgage. It basically boils down to how much you can comfortably repay each month.
How can I find the best mortgage deal?
Once you’ve worked out a sum you’d be comfortable with, it’s time to start looking for a mortgage deal that will suit you.
Mortgage brokers often have access to deals that aren't available on the high street and are a great place to start looking for the best deals.
While banks expect the client will negotiate with them, or accept the given interest rate, mortgage brokers are more likely to go to bat for you to get a lower one.
They act as a middleman between you and the lenders. And most work with a variety of lenders, including banks, credit unions and private mortgage companies, which allows them to offer you a wider range of choices.
If your credit rating is less than perfect, you’re self-employed or have any other special circumstances, this extra flexibility can be very useful.
Really, having a great mortgage broker is like having a great estate agent: they get you the results you couldn't easily get yourself.
Zoopla's trusted mortgage broker partner is Mojo Mortgages.