The word 'mortgage' in French law is used to mean 'death contract'. Therefore, a mortgage is naturally quite a daunting prospect. Before applying for a mortgage, you need to think carefully about the decision you are making. It is more than just a case of simply being able to afford the monthly repayments. Mortgage providers will look carefully at not just your income and outgoings, but also assess whether you will be able to keep up with repayments if there is a change in interest rates in the future or if you have a change in circumstances.
Gone are the days when mortgage lenders simply based the amount you could borrow on a multiple of your income.
For example, if your annual household income was Â£40,000, you may have been able to borrow five times this, meaning that you could have had a mortgage of up to Â£200,000. This is known as the loan-to-income ratio.
These days things have changed and it is likely that the lender will limit the loan-to-income ratio to no more than four and a half times your total income.
Lenders must also assess the level of monthly payments you can reasonably afford. In doing so they will take into account various different aspects of your income, which we will go onto later in this guide. This is known as an affordability assessment. These changes were brought into action by the Financial Conduct Authority in 2014 following a review of the mortgage market.
The lender must also 'stress test' your ability to meet your mortgage repayments, taking into account the effect of potential interest rate rises and possible changes to your lifestyle, such as redundancy, having a career break or even a baby.
Unfortunately even if you have different opinions, if the lender considers that you may not be able to afford the mortgage payments in these adverse circumstances, it could limit the amount you can borrow.
A good starting point for anyone trying to find a mortgage is to look at the comparison sites.
What lenders takes into account
When assessing how much you may reasonably be able to afford to borrow, the lender will look at:
1. Your income
Your basic income and any other earnings you have. Overtime, additional jobs and even bonus payments can be taken into consideration. Lenders will also take into account income from investments, pensions, child maintenance and financial support from ex-spouses.
However, before your get creative with your calculations, remember that you will need to provide pay slips and bank statements as evidence of your income.
If you are self-employed you may need to provide business accounts, bank statements and even details of the income tax you've paid.
2. Your outgoings
These include; credit card repayments, loans, credit agreements, maintenance payments, bills such as Council Tax, water, gas, electricity, phone, and broadband. Other bills that are also taken into account include insurances, building, contents, travel, pet, life, etc.
The lender may ask for estimates of your living costs such as spending on clothes and basic recreation. Again! Try not to be creative here as lenders may even ask to see recent bank statements to back up the figures you supply.
3. Future changes that might make an impact
We all know that changes happen and the lender is no different. They will assess whether you would be able to pay your mortgage if interest rates increased, you or your partner lost their job and if your lifestyle changed for reasons such as illness, having a baby or a career break.
It's important that you also think ahead and plan how you would meet your payments if any of these things happened. For example, you may be able to protect yourself against these unexpected circumstances by building up savings. It is important to try to make sure that these savings are enough for three months of outgoings, including your soon to be new mortgage payments.