HOW MUCH CAN YOU BORROW?

First Things First

Before you even start looking for a property anywhere in the UK you really should try and work out exactly what you can afford to borrow. You really need to ask yourself the question how much should I borrow. The emphasis here is on what you can afford to repay and not on the maximum amount available. Talk to a mortgage broker as soon as possible and apply for a mortgage agreement ‘in principle’.

Agreement in principle simply means that the lender is willing to give you a mortgage subject to other conditions being met, such as a satisfactory credit check and property valuation.

Give us a call and one of our brokers will help you work out what you can afford and how much you can borrow. They will then be able to get you a great mortgage deal agreed in principle.

It will tell you what the mortgage will cost you and it lets estate agents and sellers know that you are well prepared and serious about buying. It may also mean that getting final agreement and your money might take less time than if you hadn’t got it.

This will also give you an advantage if you make an offer on a property as sellers will know that you can mover faster than someone who doesn’t already have a mortgage agreed.

Can You Afford a Mortgage?

There are lots of different deals available to first time buyers and you should make sure that you really do understand how your mortgage works and how the interest rates might change and the impact this may have on what you have to repay each month.

This is especially true if you have a special deal where initial repayments are discounted or fixed for a few years at the start of your mortgage. When this initial period is over your repayments will increase and you must be sure that you will be able to afford this increase when it becomes due.

Do some financial planning to carefully look at your normal expenses and work out what you currently spend each month and subtract this from your total monthly income. If you will also be putting money away into savings each month then this too will have to be subtracted from your income. The money you have left will be what you can use to pay your mortgage.

Also ensure you budget for all the additional costs you will have to pay during the buying process and moving because these could be substantial.

Make sure you are comfortable with your repayments and if you aren’t reduce the amount you want to borrow, do the sums again and repeat until you are happy.

You will then know exactly how much you will be borrowing. Adding this to your deposit amount (if any) will tell you the maximum price you can afford when looking for your house or flat.

How Much Can I Borrow?

The actual value that a mortgage company will lend to you is closely linked to your income.

If you are buying a property on your own then typically you could get 3.5 times your gross annual salary. For a couple the maximum loan size would normally be 3.5 times the first gross salary plus the second salary OR 2.5 times both incomes if this is larger.

Don’t be tempted to borrow the maximum available unless you really know you can afford it as you could find yourself overstretched if interest rates were to rise!

The size of your loan will also depend on how much deposit you have to put down. The lender will look at the Loan to Value (LTV) percentage, which is the amount to be borrowed as a percentage of the property value.

For example, if the value of the property is £100,000 and you have a £20,000 deposit you will need to borrow £80,000 and the LTV will be 80%.

If you have no deposit then the loan amount is the same as the property value and the LTV is 100%, meaning you will need to get a 100% mortgage.

Other Costs to Consider

There are other significant non-mortgage related costs involved in buying a property, which will need to be paid. These include legal fees, survey fees and stamp duty land tax.

You will have to pay legal fees to your solicitor for local authority searches, land registry costs and other work required as part of the buying process. These will typically amount to about £400.

Fees will also have to paid for doing a full structural survey of the property before you make an offer. You don have to do this but it is strongly recommended that you do because it will let you if there are any structural issue with the building you are considering and for this reason alone it is money well spent, especially for an older property. Such a survey may cost up to £1000 and will vary depending on the size and/or price of the building to be surveyed.

The major cost you may have to pay will be stamp duty land tax. This is a tax which must be paid to the government on the purchase of any property with a purchase price over £125,000 (effective 23 March 2006). If the purchase price is £125,000 or less then you will not have to pay stamp duty.

The amount of stamp duty payable also varies according to the purchase price. For the range £125,001 to £250,000 it is 1% of the purchase price, for £250,001 to £500,000 it is 3% and for £500,001 or above it is 4%.