How is a mortgage calculated?

When thinking about applying for a mortgage there are a number of things you should consider. Mortgage providers look at your income and outgoings to see if you can afford the repayments if interest rates rise or your circumstances change.

What can you afford?

In the past, loan-to-income ratios were used by mortgage lenders which meant they based the amount you could borrow mainly on a multiple of your income. Nowadays, the lender will cap the loan-to-income ratio at 4.5 times your income.

The lender will also carry out an affordability assessment which takes into account various personal and living expenses as well as your income.

A ‘stress test’ is also carried out, testing your ability to repay your mortgage when certain changes in circumstances are considered such as interest rate rises, redundancy, having a baby or taking a career break. If the mortgage lender thinks you won’t be able to afford your mortgage payments, they might limit how much you can borrow.

Use our mortgage calculator to estimate how much you can borrow and what your repayments might work out as.

What information do you provide to your lender?

Your mortgage lender will ask for the following information from you:

· Your basic income (bank statements and pay slips will need to be provided)

· Income from Pension or Investments

· Income in the way of financial support from ex-spouses or child maintenance

· Any other earnings you have e.g. overtime, freelance work etc.

If you are self-employed you will need to provide bank statements, business accounts and details of the income tax you have paid.

You will then need to show proof of all outgoings:

· Credit card repayments

· Maintenance payments

· Insurance

· Any other loans or credit agreements

· Bill such as water, gas, electricity, broadband

· Living costs such as spending on clothes, basic recreation, childcare etc.

To help with this section, you can check your credit report before applying for a mortgage. We recommend using Checkmyfile.

The lender will then assess whether you could pay your mortgage if interest rates increased, your partners lost their job, you couldn’t work due to illness or your life changed (having a baby, or a career break).

How much will I be able to borrow?

Our mortgage calculator can help you find out how much your monthly payments would be if interest rates rose in the future.

If you only have a small deposit or are on a low income then the government has schemes that can help such as help-to-buy.

What’s next?

Get in touch today if you would like to discuss your new mortgage or find out more about re-mortgaging your property.

*Your home maybe repossessed if you do not keep up repayment on your mortgage.

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