Affordability is key to mortgage borrowing
Applying for a mortgage can be daunting, especially if your financial history isn’t the best.
I received an email about this the other day, which I thought might be worth sharing.
My correspondent already has a mortgage on a shared ownership basis and wants to buy a house the conventional way.
He writes: “My credit history isn’t great, but I have not missed a mortgage payment over the last three years.
“I now wish to purchase a house that I totally own. My salary is £28,000.
“How much could I borrow? (I’m looking in the region of £130,000.) And from whom?”
Let’s start with the second question.
If you’ve kept up with your payments for three years, you should find most mainstream lenders will be willing to consider you, and they should be your first port of call, as they’re far cheaper than impaired credit lenders.
Contact an independent mortgage broker and they’ll shop around on your behalf.
As for the question of how much, traditionally, most lenders would give up to 3.5 times your salary, allowing you to borrow £98,000.
But nowadays they’re often a bit more flexible.
Many will go up to four or even five times annual earnings, provided you don’t have many other debts eating into your cash.
In theory, this would enable you to borrow £112,000 or £140,000.
Discount deals are currently available from around 5.5 per cent and fixed rates from 5.75 per cent.
With the latter, the monthly repayment on a £140,000 loan would be almost £900.
This is a dangerously high proportion of your earnings, considering all the other costs of homeownership – and life in general – and if rates rise, this would increase.
If you couldn’t cope, you could lose your home.
Even borrowing, say, £110,000, you would have to repay about £700 a month, so think carefully about what you can afford.
This – rather than what you are able to borrow – is the crucial question to consider.
And do your sums carefully before you commit yourself.
