How much can I borrow for a mortgage? Rates explained

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Both the cost of living crisis and the Bank of England’s decision to raise interest rates have made understanding what mortgage you can afford crucial

In addition to announcing the change in the key interest rate, the country’s central bank also announced forecasts that inflation will top 13% in October 2022 and a recession is imminent.

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With the UK facing a major cost of living crisis, it’s important to know what you can afford (Image: AFP/Getty Images)

So how do you find out what mortgage you can afford – and how is it calculated?

Here’s what you need to know.

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How are mortgages calculated?

Mortgages are calculated based on your employment status, income and expenses.

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Lenders will want to assess whether you can keep up with your monthly mortgage payments.

  • your salary
  • Income from pensions or investments
  • Income from child support payments and financial support from ex-spouses
  • All other income – including overtime, commissions or bonuses from your job and any other jobs you have.

To assess your income, lenders require payslips and bank statements as proof of your income.

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The Bank of England has raised interest rates to 1.75% (Image: AFP/Getty Images)

Self-employed persons must also provide business accounts, income tax data and tax returns for up to three years.

  • Credit Card Refunds
  • alimony payments
  • Insurance – for example for buildings, household goods or travel
  • Any other loan or credit agreement you have
  • utility bills

The lender may also require you to estimate other living expenses, e.g. B. how much you spend on clothing or recreation.

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They will most likely also take your credit history into account, so you should make sure you’ve checked it out and are happy that it accurately reflects your financial situation.

Mortgage affordability rules changed in August 2022 (Image: Getty Images)

“Your income multiplier, extra income, and expenses all affect a lender’s decision on how much to offer you in the form of a mortgage,” says Almas Uddin, founder of mortgage brokerage firm Revolution Brokers.

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“Using this information, they will conduct an affordability assessment, but they will also stress test your ability to repay.

“This determines whether you can meet your mortgage repayments if monthly expenses increase or your income changes, such as if you lose your job, change jobs, or have a child.”

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The way mortgages are calculated changed this month.

This mechanism was an analysis of a potential borrower’s ability to repay their mortgage in the event of a significant change in their income or expenses, such as the birth of a child.

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Instead, all they have to do is meet the loan-to-income (LTI) limit.

This limit limits the number of mortgages that can be granted to borrowers with an LTI ratio of at least 4.5.

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The LTI rate usually determines how much mortgage you can borrow (Picture: Getty Images)

It is designed to protect lenders from collapsing when too many borrowers default on their loans – a problem that was a feature of the 2008 financial crash.

The Bank of England said taking the test would maintain a “reasonable level of resilience to the UK financial system” while making mortgage rules “simpler, more predictable and proportionate”.

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However, Gemma Harle, MD at Quilter Financial Planning, said at the time that the change could make it harder for first-time buyers to climb the real estate ladder, as it would push home prices up.

How much can I borrow for a mortgage?

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According to Revolution Brokers, you can generally get a mortgage worth four to six times your annual income.

So if you and your partner earn £50,000 a year combined, you can probably get a mortgage of at least £200,000.

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However, if you have significant savings that can serve as a deposit, or you are able to take advantage of a government program such as Help to Buy, this rule may not apply to you.

Being able to extend your mortgage for a longer period of time can make it easier to borrow – although you would be paying more overall because of the interest payments on your loan.

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There are several ways you can top up your mortgage (Image: AFP/Getty Images)

The government has said it is considering introducing extra-long mortgages to open up the housing market to more people.

What is a mortgage calculator?

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Aside from a mortgage brokerage process, you can roughly calculate how much mortgage you can afford by going to a mortgage calculator.

But not all comparison sites will give you the same results, so it’s worth getting a few estimates to understand what area you’re looking at.

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How can I top up the mortgage I can borrow?

Industry expert Almas Uddin says there are several ways to maximize the amount of mortgage you can borrow.

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Get a decent mortgage broker

“A good broker will help you get the most competitive rates and prices, and suggest the best possible mortgage products to suit your unique situation,” he says.

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“Ideally, you want to go with a whole-of-market broker because they have access to every product on the market at any given time.

“All too often, buyers go straight to their bank because they’re a familiar face, but that can severely limit their options.

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“Because a broker also deals in volume, lenders will often offer them cheaper interest rates, so a good broker is certainly able to determine the quality of mortgage you can secure.”

Do a financial spring cleaning

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“Pay off your debts, close any accounts that are no longer needed, improve your credit, do what you can to improve your credit, and if you’re in line for a raise, wait until you do.” apply,” said Mr Uddin recommends.

“You can also use a budget planner to keep costs under control and save consistently to show signs of financial responsibility.”

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Avoid making big life changes when applying for a mortgage

“Changing jobs or becoming self-employed before applying, investing in a major purchase like a new car, and co-signing a loan for someone else can impact your mortgage affordability — especially in the current climate,” says Almas Uddin.

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“Multiple new searches on your credit report can also be harmful, such as B. new credit cards or bank accounts.

“Borrowing too much, having existing outstanding debt, and even making major lifestyle changes such as B. Having children can also work against you.

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“It probably goes without saying, but any recent defaults or court rulings are also a big red flag.”

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