How much can I borrow? Mortgage rates explained
MORTGAGES are provided by banks or building societies to help you buy a property – you provide a deposit and they sort the rest.
You'll likely need one to buy a house and your income, expenses and financial history will all determine exactly how much you can borrow.
We explain everything you need to know about applying for the loan and how you can use it to get on the property ladder.
How do mortgages work?
A lender will provide finance up to a certain amount based on what the property is worth, known as the loan-to-value (LTV) and you will need to put down a deposit for the rest.
For example, if a mortgage is advertised with an LTV of 80% you would need a 20% deposit.
So if you are purchasing a £200,000 home, a mortgage lender would lend you £160,0000 and you would need to make up the remaining £40,000.
The loan will need to be repaid each month over an agreed term, plus interest, and is secured on your home until the debt is paid off.
As with any loan, there is interest charged on the monthly repayments.
If you fall behind on your repayments there is a risk that your home could be repossessed.
Can I get a mortgage?
Your chances of getting a mortgage will depend on several factors.
The lender will want to know your age, job, income, expenses and dependants as well as your lifestyle and future spending plans.
This information will be used to conduct an affordability assessment to see if the lender is comfortable giving you the money you want and if it thinks you will be able to repay.
It will also conduct a stress test to see whether you can still afford the mortgage if the cost of it rises.
There is no set credit score to ensure the best mortgage.
But as with any type of debt, the higher your rating, the better your chance of accessing the best rates and getting approved.
What mortgage can I afford?
The key question for many is how much can I borrow – mortgage lenders will combine the income of everyone applying and assess the ability of all borrowers on the application to repay.
Lenders will have different income requirements but traditionally borrowers can get a mortgage of up to 4.5 times their income.
Lenders will consider whether you can afford the repayments each month, so if you’re making regular payments for credit, such as loans and credit cards, the amount they will lend is likely to be lower.
They will also factor in your regular outgoings such as childcare costs and bills.
If you earn £30,000 a year the maximum you may be able to borrow based on 4.5 times your income would be £135,000 but that may be doubled if there were two people earning the same amount.
The calculation may be different when there is more economic uncertainty though, or if a lender believes you cannot afford such a large loan.
Income is just one factor and lenders will also check your credit report and will want to know about your age, employment history, lifestyle and how you spend your money.
Can you get a mortgage with bad credit?
All lenders will conduct a credit check when you make a mortgage application.
They want to see evidence that you have a strong track record of repaying debts.
Bad credit such as arrears or county court judgements can lower your credit score and these are red flags for lenders as they may see you as a more risky borrower.
This can make it harder to get the best mortgage deals, depending how old your bad marks are.
Some lenders such as building societies or specialist lenders can be more flexible but the rates charged can be higher.
Bad marks stay on your credit file for six years, so it may be worth waiting until these expire and building up your rating by paying off other debts to boost your score and improve your chances of getting finance in the future.
How long does a mortgage application take?
The time it takes to get a mortgage will vary among lenders and depend on how busy they are and how complex your application is.
A lender may have lots of questions about your income or spending habits and may ask for more evidence to show you can afford a loan.
You may even have to wait for an appointment to have a mortgage interview during busy periods.
Generally it can take two to six weeks to go from application to offer stage, but you might find it takes longer than this because of the current market and busy periods.
How long does a mortgage offer last?
A mortgage offer will typically last for six months.
This should give you enough time to complete a property purchase.
If you go beyond the deadline, or your income changes, the lender may want to do a new application.
How much deposit do I need for a mortgage?
The amount you need for a deposit will depend how much the bank is willing to lend you, known as the loan-to-value or LTV.
Most first-time buyer mortgages will have an LTV of 90% or 95%, this would mean you need a deposit of 10% or 5% respectively.
For example, you would need a £20,000 deposit if you were buying a £200,000 property with a 90% LTV mortgage or £10,000 for a 95% LTV product.
How to apply for a mortgage
Applying for a mortgage takes a lot of preparation.
You can compare mortgages yourself on a comparison website or use a broker to help find the most suitable offers.
One of the most important documents is your credit file.
The lender will want to see evidence that you can repay your debts and it will do this with a credit check.
This documents all the debts you have had in the past such as credit cards and loans and whether there have been any arrears or defaults.
It will also show any county court judgments, individual voluntary arrangements or bankruptcies from the past six years.
You will have a credit rating based on how well you manage your debts and the higher it is, the better your chance of accessing the best mortgage rates.
Check there aren't any mistakes on your credit report before applying for a mortgage and also make sure you are on the electoral register as this can also boost your score.
You will also need to provide proof of your name and address as well as employment details and evidence of your deposit.
The lender will usually want to see at least three months of bank statements and payslips.
There may also be a mortgage interview where the lender will ask about your spending habits.
The lender will take all this information to conduct an affordability assessment to see if it thinks you can afford the mortgage.
It will also do a stress test to see whether you can still afford the loan if interest rates and the cost of your mortgage rise.
A lender will require that you have buildings insurance when you take out a mortgage so the property they are lending on is protected and you could also take out life insurance too.
It can often pay a lump sum, if you or your partner dies, that covers the mortgage debt so your loved ones can still afford to stay in the family home.
What is a buy to let mortgage?
A buy to let mortgage is a loan used by landlords to purchase a property as an investment that they will then rent to tenants.
You don't need to worry about a buy to let mortgage if you're looking to buy a house for yourself that you are going to live in.
The idea is that the rent paid by tenants covers the mortgage and often provides some profit for the landlord.
The application process is slightly different for a buy to let mortgage.
A lender may look at a landlord's income and credit report, but a more important factor is the rent.
The bank or building society will want to ensure the rent covers the mortgage repayments.
Lenders have different requirements but will often want the rent to be worth up to 125% of the monthly mortgage payments.
Most buy to let mortgages are offered on an interest-only basis.
This means the landlord doesn't have to worry about repaying the whole loan until the end of the mortgage and only pays interest each month, which is usually covered by the rent.
A landlord will often remortgage to a new deal once their buy-to-let loan comes to an end.
Landlords can also do a buy to let mortgage comparison online using a comparison website or through a broker.
Many lenders will also have an online mortgage calculator that shows how much rent needs to be charged to cover a buy to let loan.
What is a mortgage in principle?
A mortgage or agreement in principle lets you see how much you could borrow without having to do a full mortgage application.
Most lenders will let you get a mortgage in principle on their website.
You will need to enter personal details such as your age, income and expenses, but unlike a full application there is a soft credit check. This is quick look at your credit report and doesn't affect your credit score.
The lender will give you an indication of how much you can borrow based on their criteria and the information you provided.
It won't include any rates and isn't a concrete offer but a mortgage in principle gives you an idea of the properties you can afford.
Having a mortgage in principle puts you in a better position with an estate agent and property sellers when making an offer, as it shows how serious you are.
A mortgage in principle typically lasts for 60 to 90 days.
What is a mortgage broker and should I use one?
A mortgage broker is a type of regulated financial adviser dedicated to getting you a home loan.
Unlike a bank or building society, a mortgage broker will scan the market and try to find the best mortgage for you from a range of lenders.
In contrast, a bank or building society will only offer their own products, which can limit your choice.
A mortgage broker will consider your financial situation, your property value, deposit and spending plans to build your application and will fight your corner to get you approved.
This could be of benefit if you are self-employed or have a poor credit rating as they may have more experience of dealing with these sorts of applications.
It saves time on doing multiple applications as you just tell your broker your income and expenses and they will work out the best mortgage you can get and may even have access to exclusive deals.
There are some downsides though.
A mortgage broker may charge extra fees for their advice.
There are some lenders that don't work with brokers and advisers may be tied to a panel of lenders, so you could also miss out on other offers.
Should I pay off my mortgage?
You need to make the monthly repayments on a mortgage or you could fall into arrears and a lender could repossess your home.
Falling behind on your debts can also leave bad marks on your credit report and push down your rating.
There is also an option to pay more each month.
This is known as making overpayments and can clear your mortgage earlier.
You could do this if you have lots of spare cash sitting in savings earning a low return.
But make sure you are not using money that you may need in the future.
If you are paying more for your mortgage each month than you are receiving in interest from savings or investments,you could instead put the money towards reducing your debts.
Most lenders will let you overpay a certain amount each year, typically 10%.
But you can be charged if you overpay too much.
Repayment charges can be introduced if you clear the mortgage before the end of the term.
Most lenders have mortgage calculators on their websites that tell you how much sooner you could clear your mortgage by making overpayments.
Can you get a mortgage on benefits?
Being on benefits shouldn't stop you getting a mortgage but may reduce the amount you will be lent, depending on which benefits the lender will treat as a form of income.
A lender will treat the benefits you receive as a form of income.
This may limit the size of the mortgage you can get though if you don't have other money coming in.
Borrowers on benefits such as Universal Credit can also get help with their mortgage repayments using the government's Support for Mortgage Interest loan scheme.
How to get a mortgage on a low income
You can still get a mortgage even if you are on a low income but you are likely to be given less in your loan.
There are mortgage schemes aimed at borrowers on low incomes, such as shared ownership.
This lets first-time buyers purchase a portion of the equity in a property if they can't afford to take out a mortgage for the total value of the home.
You’ll co-own your home with a housing association,often a new-build, which will charge you rent on its portion of the property.
Buyers must purchase between 10% and 75% of the property to use the initiative, and they can then “staircase” – buy more shares in instalments – until they own 100% of it.
You can fund your share using a shared ownership mortgage.
You can use the shared ownership scheme as long as your household earns £80,000 a year or less, or £90,000 in London.
You must be a first-time buyer or have sold your home and be unable to afford a new one.
How to save for a mortgage
The average UK house price is around £250,000, according to Land Registry data.
You would still need a deposit of at least £12,500 even with a 95% LTV mortgage.
Some buyers may be lucky enough to call on the bank of mum and dad but most people will need to save.
Check property websites such as Rightmove or Zoopla to get an idea of the price of properties you can afford and where you want to buy.
It is also worth using a lender's mortgage calculator to see how much you can borrow based on your income.
You can then set a savings goal and work out how much money you need to set aside and how long it could take to reach your target.
You may have to budget and cut some of your spending and you could put the money into a savings account to earn interest and boost your deposit.
What is a tracker mortgage?
There are two types of mortgage, a fixed rate and a tracker.
A fixed rate mortgage provides an interest rate that remains the same for an agreed period such as two, five or even 10 years.
Your monthly repayments remain the same for the whole deal period.
This gives a borrower more security as you can predict what your repayments will be each month for a set number of years.
In contrast, a tracker mortgage sets your rate a certain percentage above or below an external benchmark. This is usually the Bank of England base rate or a bank may have its own figure.
If the base rate rises, so will your mortgage but if it drops then your monthly repayments will be reduced.
In both these cases your repayments can change if the SVR is moved up or down.
Variable rate mortgages often don't have exit fees while a fixed rate could do.
What is a good mortgage rate?
The most suitable mortgage rate for you depends on a range of factors, such as your income and deposit, as well as whether you are opting for a fixed or tracker deal.
You will usually need a large deposit to access the lowest rates, but pricing can still be competitive even if you are only putting a small amount down.
Mortgage rates are influenced by the Bank of England base rate and how much it costs lenders to borrow the money on the wholesale markets.
It also depends how much competition there is in the market and how keen a lender is to attract new customers and build market share.
How much could I borrow?
The amount you can borrow will depend on your income, expenses, credit report and a lender's affordability assessment.
How much can I borrow? Mortgage lenders will have their own criteria and some may be more flexible than others, particularly when it comes to borrowers who are self-employed and may find it harder to prove income.
You can boost how much you can borrow by buying with someone else instead of just on your own.
For example, if you have income of £30,000 you may be able to get a mortgage of £135,000 based on a lender approve a loan worth 4.5 times your earnings. This is likely to be lower if you have regular payments for credit and outgoings.
But you could increase the loan amount if you buy with someone else as there is an extra income on the application.
For example, two people earning £30,000 could get a mortgage of £270,000 based on a loan of 4.5 times your income.
This will also depend on each person's credit report and the lender's criteria.
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