When it comes to taking out a mortgage the two most common questions that come up are ‘How much can we borrow?’ and ‘What’s it going to cost?’. We explain how you can help answer those questions by understanding your financial position.
Understanding how much you can borrow
Firstly, a quick history lesson to explain how lenders work! March 2016 saw the introduction of new legislation in the mortgage world – the adoption of the Mortgage Credit Directive (MCD), across all lenders in the UK, to be applied to both first and second charge mortgages. The MCD aim is to ensure that all consumers who bought a property with a mortgage or took out a loan secured against their home (e.g. a remortgage) were adequately informed and protected against the risks.
One of the key aspects of the legislation is that the responsibility placed on lenders to assess the affordability of a loan for a customer. Traditionally, lenders would use a multiple to determine how much you could borrow e.g. on a joint application a couple might be lent 3.5 times the main income plus the second income or four times their joint income. MCD requires lenders to make a more bespoke assessment and look at customers income and expenditure to ensure that they can afford the mortgage. Monthly expenditure such as credit commitments, school fees, child-care costs and social spending now have to be analysed to ensure that the amount a person was borrowing, would actually be affordable for them, taking in to account their other outgoings.
As a result, the lenders introduced affordability calculators which would total up the borrowers income and then off set their expenditure to determine a final lending figure. The legislation had to be interpreted by the banks and therefore we find different lenders may lend different amounts. It’s our job to match up a client with the lender that will not just lend the best terms but the right amount of money for their need.
How to understand your own expenditure
If you ask most people to ‘write down how you spend your money’ they break out into a cold sweat. Most of us are not adept at balancing our own books on a daily basis. That being said, trying to get a grip on what’s coming in and what it’s going out is the first step to understanding your own affordability and in turn being able to discuss this, to your advantage, with a mortgage adviser.
To understand your affordability, begin with a blank sheet of paper (or excel spread sheet if you want to get a gold star!) and calculate your average income. For most people its recommended that you work out the average over the last three months (excluding any one off windfalls e.g. annual bonus etc.). Next, look at your outgoings, note down all the direct debits that are regularly coming out of your account which are normally best listed under ‘Essential Expenditure’ i.e. contractual existing mortgage or rent payments (these are likely to be replaced long term but for the purposes of this, knowing the cost is helpful), utility bills, council tax, mobile phone, food shopping, care costs, gym membership etc.
Next you need to work out your ‘Non-essential expenditure’ – how much you spend on other items such as coffee, meals out, fashion, socialising, travel. These are items you pay for regularly but could do without if need be. This is often cash withdrawals.
You should now have 3 columns:
- • Income
- • Essential expenses
- • Non-essential expenses
Take your income and minus essential expenses. Determine how much non- essential expense you should be limited to monthly and then take that away too. The final figure is then the starting point for what you can afford, ready to discuss with your mortgage adviser.
What will it cost?
The second question also comes down to your budget. The amount you can afford to pay off each month, together with the deposit that you have to put down towards the loan, all count towards the rate at which you are offered the loan. In theory the more that you can put down as a deposit, and the more you can pay off each month, the better the rate will be on the money borrowed.
The options and costs of a mortgage is where your mortgage adviser earn their fee! It’s their experience at looking at the circumstances and seeking out the best options for your individual situation, along with their knowledge and access to the lenders that get you the best deals to choose from!
The starting point and our recommendation for anyone looking at mortgages, is to get your finances organised and understand your current expenditure and speak to us!
Your home maybe repossessed if you do not keep up repayment on your mortgage.