It won’t surprise you to know that perhaps the most common question me and the team are asked is “how much can I borrow?”
Which makes sense. After all, it’s hard to go house hunting if you don’t know how much you can spend.
We’re doing lots of exciting work at the moment to bring you some really helpful tools to speed up this process, meaning that soon you’ll be able to pop on to our website and get a very accurate idea of what you can borrow. And this will be coming live from actual lenders.
But I thought it might be helpful to share some “top tips” (actually it’s probably more just sensible advice and background information on how lenders work out affordability) so you understand how much you’re able to borrow, and if needed, increase that amount as high as it can go.
First “top tip” – increase your deposit.
It might sound odd to suggest the way to borrow more is to put more of your own money in. But there is logic to this. It’s common for lenders to lend around 4.75 X your annual income. However, if you’re only putting down 5%, often lender will limit the amount they lend to you at 4.5 X your annual income. I know it’s not always easy, but if you’re in a position to, consider increasing the size of your deposit, and therefore increasing the amount you can borrow.
Second – Look at a longer term for the mortgage
Let me qualify this first. Yes, I understand the simple mathematics that says the longer you have a debt, the more expensive it becomes. But bear with me here. A good mortgage adviser will always make sure the amount you’re borrowing is affordable and can be repaid by the time you retire – if that’s your goal. But quite often, when you’re starting out, the priority is being able to borrow as much as you can and you’re less focused on what happens in 25, 35, or even 40 years. In cases like this, it can sometimes make sense to apply for a mortgage with a longer term than you had originally planned, and then when you’re income increases as your career or business progress, you can reduce the term when it comes time to remortgage.
Third – Keep an eye on your credit file
We’re able to help customers in many unique situations. Some of them come to us because they’ve had previous issues with credit and their credit file and score may be less than perfect. And that’s ok – it happens. But the result of this can sometimes mean a lender will only lend you up to 70 or 75% of the value of the property because, well, you’ll be considered more risky. The better your credit file, the safer bet you’ll be, and the more you’ll be able to borrow compared to the value of the house.
Four – Prove it, prove it, prove it.
This is a biggie. Just because you know you’re getting money coming in, doesn’t mean the lender will accept it as part of your “usable income.” For example, child maintenance payments, for the most part, need to be evidenced by either a court order or at least 6 months continual payment into a bank account where you can show statements.
Income such as cash from relatives, or a friend who pays you rent to sleep in your spare room won’t be accepted as they aren’t considered to be reliable, and are often difficult to prove.
If you’re self employed, make sure you declare your income. Now, we’re not tax advisers, so treat this with a pinch of salt and then speak to your accountant as well. But when it comes to borrowing money, lenders want to know that you have the income to repay the loan. And they won’t take your word for it. They’re going to look at your company accounts, your bank account, and your tax return. We appreciate you may want to be as tax efficient as you can be. But you need to be able to demonstrate how much you earn in an open way, usually through HMRC or your accountant. Cash in hand might be great at the time, but think long term about how you present your finances. It makes a difference. A good accountant will be able to talk you through how to balance both needs.
Fifth and final – Consider different mortgage products, and let your adviser do the shopping around
Not all lenders are the same. Some take a lot of different factors into consideration when it comes to lending you money. One key point is that some lenders will actually lend you more money if you’re prepared to have your mortgage rate fixed for 5 years, instead of 2. This gives the lender more security and stability, and therefore may be willing to lend you more money. Your adviser will be able to tell you which lenders they are, and compare the rates for you.