Affordability counts

Today’s lenders don’t just look at your income to determine what you can borrow but also at your outgoings. This is because only by focusing on the two things together can they get a reasonable idea of what you can afford to repay on a mortgage each month.

After all, an applicant with three young children is unlikely to have the same disposable income as someone without any dependants. And someone with an expensive loan repayment to make each month will not be able to afford the same amount as a borrower on the same income without any outstanding loans.

By assessing a borrower’s affordability, lenders can build up a more realistic picture of your finances to get a better idea of how much they should lend. Not only does this make it more likely they will get back any money they lend out, it is also obligatory, as part of tough regulations imposed on lenders to protect consumers from over-borrowing. Lenders are not able to offer mortgages unless they have checked thoroughly that the borrower can afford to meet their monthly repayments.

Check your credit record

When you apply for a mortgage your potential lender will run a credit check on you to get a fuller idea of your finances and how successfully you’ve managed credit and borrowing in the past.

A credit check gives them details of all the credit agreements you have in place, such as credit cards and loans, and shows the last 12 months’ payments or whether a payment has been missed. It also shows if you have been in more serious arrears, such as being subject to a County Court Judgement or if you have been previously made bankrupt.

If you have a history of missing credit card repayments this will reflect badly on you when you apply for a mortgage. Even going overdrawn on your bank account (unauthorised) can raise alarm bells with mortgage lenders. So if you think you will want to get a property in the next year or so, start managing your finances scrupulously now.

Before you apply for a mortgage it’s worth checking out your own credit score to see what it says about you, using a credit reference agency such as Experian or Equifax. Sometimes mistakes are made and you might want to rectify them. Or, if you see that your credit record is less than pristine, you may decide to take independent mortgage advice from a broker who is specialised in dealing with such cases.

Stress-testing your finances

Not only do lenders need to check that you can afford to meet the initial repayments on a home loan, along with your other financial commitments, they must also work out whether it would still be affordable if interest rates were to rise.

This is called stress-testing your application. Lenders will assess the affordability of the mortgage based on a higher rate of interest than was originally applied for. The level of the stress-test is at the discretion of the lender.

If the Bank of England base rate is at a very low level and mortgage interest rates are correspondingly low, it is important to know you will be able to afford an increase in your monthly repayments once rates rise.

Save, save, save

Buying your first home is expensive. There are plenty of costs associated with buying your first home you need to be aware of from the outset. Saving as much as possible is important, not only to cover the costs but also to maximise the size of your deposit.

Your deposit is the biggest cost, of course, and the more you can put down upfront the better the interest rates you may be offered. Those with the biggest deposits get access to the cheapest deals in the mortgage market.

It makes sense to get saving before you decide to buy. Try to put down as much as possible upfront. Just make sure you leave enough for other associated costs such as stamp duty, mortgage fees, conveyancing costs, solicitor’s fees and removal fees, which can quickly mount up.

Use online tools to aid your search

Some lenders offer a basic calculator on their website that will give you an idea of what you can borrow based on your income and a few simple details. But you should be aware that, due to affordability calculations, any figure it comes up with will usually be the maximum available and not necessarily what they would offer you once they have investigated your whole financial picture.

To get a better idea of what you would be offered you need to get an agreement in principle (AIP) from a lender. For this the lender will ask you more detailed questions about your finances, so you will need to have some financial documents and information to hand.

After it has found out more about your circumstances the lender will decide the amount it is willing to lend provided that everything you have stated on your application is correct. An agreement in principle isn’t binding on you or the lender. However, you will get a decent idea of what you can afford, and it is a useful document to show to estate agents to prove you are a serious buyer.

Consider a broker

An independent mortgage broker may save you money by finding you the most suitable deal on the market and time because they are experienced in working with lenders to push deals through to completion. Plus, they are fully qualified to give you personal advice, tailored exactly to your needs, and will hold your hand through the entire homebuying process.

What’s your attitude to risk?

Think about whether or not you are comfortable with your monthly repayments rising over an agreed term. If you have a decent amount of leeway in your budget this may not be a problem for you, especially if it gives you access to a wider range of deals right now. But if you need to know your monthly repayments are set in stone, a fixed-rate mortgage might be a safer bet.

Help for first-time buyers

Some lenders have special first-time buyer deals that enable applicants to get onto the ladder with the help of friends and family. These could be joint mortgages or guarantor deals, for example, and it’s worth checking them out if you think you could benefit from having your parents back your mortgage.

Make sure you get covered

Your house is likely to be your most valuable asset so it makes sense to protect it with buildings and contents cover. But there are other insurance policies that could prove invaluable and are worth checking out. Life insurance is highly recommended if you have dependents so that your mortgage would be paid off in the event of your death. Critical illness cover pays out a lump sum if you are diagnosed with a serious illness, and income protection insurance will pay you a monthly amount should you become unable to work due to ill health.