FAQs
How much can I borrow?
This used to be an easy question - banks and building societies would lend a multiple of your income, normally three times the main income plus once the lower or 2.5 times joint income, whichever is the greater. However, over the last few years as interest rates have fallen, lenders have been prepared to provide much larger income multiples and, in some cases, this measure of affordability has been discarded altogether.
Most high street providers will still use income multiples as a basis for their lending policies. However, questions as to your credit score, job prospects (are you a recent graduate or training to be a doctor, solicitor, accountant, etc?), the level of deposit you can commit and the size of your income will affect the level of multiple used.
As a general rule the changes have suited joint applicants where it is now possible to borrow up to 4.5 times income in certain circumstances. For single applicants it has been known to be able to obtain between 5 and 6 times income although this is unusual and the lender may restrict this level of borrowing to specific products such as longer term fixed rates.
One or two high street lenders now assess each case on an "affordability" basis. Instead of using "gross" income in their calculations, the lender will compute your take home pay after tax and national insurance, deduct any other ongoing monthly debt outgoings (such as personal loans or credit card payments or maintenance payments to an ex-partner) and assess the affordability of the new proposed mortgage. This type of assessment often provides joint income couples with little or no other debt higher multiples than is traditionally the case.
It is also wise to consider your own circumstances. Of course you want to get on the housing ladder or get those extra bedrooms but do not forget the other costs that will be incurred each month such as utility bills (gas, electric, water, etc), council tax and mortgage insurances such as buildings insurance (compulsory with all lenders), life, ill health and contents. This will add considerably to the overall cost of owning your own home.
What is income?
If employed, your income may be made up in different ways such as: -
- Basic
- Overtime both guaranteed and/or regular
- Bonus both guaranteed and/or regular
- Shift Allowance
- Commission
- London/Big city weighting
Each lender will have their own criteria on how these are treated but, if proof can be provided by way of reference and/or payslips that the overtime, etc is regular, some high street lenders will take the entire income into their calculations whilst others will only take into account half of any regular overtime or bonuses. Guaranteed payments are unusual but would be used in full if received.
Will Lenders Take Into Account State Benefits?
Again, a difficult question on which to provide a blanket answer. At one time the answer would have been no but it is now becoming more common for lenders to take into account some state benefits although unusual, but not impossible, that it is included in full. Each case would need to be put to the lender to see what was possible.
Employed/Self-Employed
The self-employed are treated differently to employed applicants. If employed, although not universal, it is possible to obtain a mortgage at the very start of your employment period with a particular employer. If the contract of employment can be provided at time of application or even your very first payslip, a number of high street lenders may be willing to provide mortgage finance. However, the self-employed have to provide to any mainstream lender, at least one year and normally three years accounts.
For the self-employed, an underwriter will be looking at a history of increasing net profit each year and will normally take the average income over the previous 2 or 3 years. This can obviously reduce the income used to calculate maximum borrowing particularly for fast growing businesses where the net profit is rising fast.
Contract working provides a more difficult scenario. There is normally no problem if there has been a contract in the past as well as the likelihood of a contract in the future with the same company. In any event, it is the job of any mortgage adviser to obtain specific details and approach lenders on an individual basis.
Self-Certification of Income
As clients" pay and employment conditions become more complex - bonus payments, commission, contract work, etc., and more and more of the working population become self-employed, the need for self-certification has become an expanding part of the mortgage market. It is primarily aimed at the self-employed market where borrowers may not be able to prove their current level of income or not have been self-employed long enough to suit the mainstream providers. However, there are outlets for self-certification of income for those who are employed.
As with mainstream lenders, each particular provider will have there own rules and regulations as to the type of income that can be used. All will take into account "earned" income but others may accept investment income, maintenance payments and/or state benefits.
With this type of loan, although the right is always reserved, the lender will not require any "proof" of this income by way of payslips, accounts, references, bank statements, etc. Depending upon the company, some checks may be run to confirm, for instance, how long you have been employed with a particular employer or with an accountant to confirm that they act for the client but some take up no references at all. However, all providers in this market will insist that an income is disclosed.
As the self-certified market is a big and growing element of the mortgage arena, there are many providers within this market many of who are subsidiaries of the high street lenders with branch networks all over the UK. However, you would normally need to deal with these lenders via an online portal or via a mortgage broker.
Other Factors Affecting How Much You Can Borrow
There are many other factors a lender will take in to consideration when assessing how much you can borrow.
Deposit
It is of course possible to buy without a deposit - a 100% mortgage as it is known. However, the lenders who will provide such finance will heavily restrict income multiples and the rates payable are usually somewhat higher than is available for borrowers with a deposit, due to the perceived risk to the lender.
One or two high street providers will lend at 100% and one or two more with only a 3% deposit (£3,000 on a property valued at £100,000). However, the general starting point to obtain a mortgage is to have a 5% deposit.
As a general rule, the bigger the deposit the more you will be able to borrow - the lender will perceive less risk in such cases.
Other Borrowings
If you are carrying other debts such as a personal or car loan or credit card balance/s, the lender will want to know and, in any event, is liable to discover other past and outstanding debts during the credit search. Most lenders will annualise your monthly payments (e.g. a personal loan with monthly payments of £200.00 per month will be assessed at costing £2,400 per year), and deduct this from your gross income prior to applying income multiples. With credit cards, a percentage of the outstanding balance is used, usually 3% or 5% of the debt, as a monthly payments and, again, "annualised" in the same way.
With lenders who use the affordability method, these monthly commitments are deducted from "net" income and therefore tend to have a much bigger impact on your ability to borrow as much as from providers using the traditional income multiple methods.
Most lenders will disregard any debts with less than six months to run.
If you are looking to repay the debt prior to completion of any new loan, lenders will have the ability to disregard these commitments although some will insist you sign a disclaim form.
Credit Search
At decision in principle or application stage, all lenders will opt to make investigations into your credit history.
Credit providers will keep the two credit reference agencies Experian (www.experian.co.uk - opens in a new window) and Equifax (www.equifax.co.uk - open in a new window) up to date on how and when payments have been made on previous and current credit agreements. In total, details are provided for the last 6 years although more in depth details provided for agreements within the last 3 years.
The lender will be looking at how you have serviced debt in the past, both secured (normally a mortgage) and non-secured (credit cards, personal loans, etc); do you make payments in full and on time or are you consistently late?; have you defaulted on any credit agreement within the last 6 years?; do you have any County Court Judgements appearing during the last 6 years?
There are cases where the applicant/s may not have any previous credit and therefore no history. This can cause problems as the lender will have absolutely no idea how you will run the account. Indeed, if you do not appear on the electoral register (see next section below) and have no credit history it can become very difficult on occasions to obtain mortgage finance.
You can obtain your credit file from both the agencies by going on to their websites, detailed above, and can be obtained instantly online or by post. If you do know of problems with previous credit or have had problems in the past in obtaining such things as store and credit cards, it is advisable to have your credit file to hand when speaking to a mortgage lender or broker. If you are declined, the lender will not specify the reasons other than to refer you to your credit file.
Although having a good credit history is a positive advantage, there are cases where a lender will decline because of excessive credit applications. Therefore, if you have been walking down the high street and attempted to obtain a loan from all the well known high street banks and building societies and been refused, it is a good idea to go away, obtain your credit file and provide this to either the lender or your broker prior to having any further searches undertaken. Each lender will have searched your credit file to ascertain your circumstances and left a" trail" for the next finance company to trace. The more attempts that have been made, the more difficult it becomes to obtain the loan you need!
Electoral Register
The credit reference agencies will hold information on their records regarding, amongst other things, whether or not you appear on the electoral register and other "associated" addresses.
Appearing on the electoral register has become more important over the last couple of years as it also can be used as proof of residency, a requirement under the Money Laundering Act 2003. It can affect your ability to obtain mortgage finance specially if no other credit history is available (see "Credit Search" section).
Proof of Identity
All organisations within the house buying process will require you to prove your identity, including the estate agent selling the property, the bank, building society and/or mortgage broker and the solicitor/conveyancer undertaking the legal requirements of any purchase. This is normally obtained via your passport (all European Union passports are valid) and/or a UK driving licence (both the old and new style versions). There are circumstances where this is not possible and there are other documents you may hold that are also suitable - this will vary slightly from lender to lender- but would normally include a firearms or shotgun certificate, state pension or benefits book, sub-contractors certificate or Inland Revenue tax notification. A birth certificate is not acceptable.
Proof of Residency
Applicants will also need to prove residency at their declared abode/s. As stated earlier, the fact that the applicant/s appear on the electoral register may suffice but it is usual for clients to have to produce a recent bank statement or utility bill as proof. Other documentation usually accepted includes a council tax demand and recent mortgage statement.
Maintenance
Maintenance payments following a relationship split are treated in a similar method to debt commitments. With lenders using income multiples, the monthly payment is annualised, deducted from annual earnings and this reduced figure used as income.
Life Assurance
Life Assurance jargon buster
There are several different ways to protect your mortgage; examples of these are listed below. Accident, Sickness & Redundancy Cover.
You are strongly advised to effect such arrangements in connection with your new mortgage.
This type of cover policy normally provides cover for up to 12 month's, longer term requirements would be met by the provision of Permanent Health Insurance, details of which are available upon request.
Sustainable Home Ownership
Recent years have seen a substantial change in the help and benefits provided by the Government to home owners with mortgages, with very much the emphasis being placed on home purchasers to ensure that they have suitable means of being able to continue to support the repayments of this type of loan in the event of Accident, Sickness & Redundancy.
Details of some of the main restrictions applied in respect of State Benefits are as follows;
State Benefits will only cover the Interest element of the loan.
If a partner works more than 16 hours per week, no help will be given in respect of mortgage interest payments.
If you have more than £8,000 in savings, no financial assistance will be given, only partial benefit may be given to individuals with savings between £3,000 and £8,000.
With a new mortgage, no assistance will be given for the first nine months of incapacity.
Further information can be found on the FSA website
If a mortgage exceeds £100,000, mortgage interest payment benefits will only be given up to the £100,000 level.
*This list is not exhaustive.
Life Insurance & Critical Illness Cover
Level term assurance is a low cost form of life cover, to pay out a specified sum should you die. The term will normally be determined by the term of the loan. You are aware that if you were to fall ill after this point, the policy will have lapsed at a time when you could be uninsurable. This type of arrangement is normally used in conjunction with an 'Interest Only' mortgage or possibly an PEP or ISA mortgage.
Pension Term Assurance
This is a form of term assurance, taken out under a personal pension arrangement, it is extremely tax efficient. This type of arrangement is mainly used in connection with a 'Pension Mortgage' although not exclusively.
Mortgage Protection Plan
Used in conjunction with the repayment mortgage, a Mortgage Protection Plan is a type of term assurance. The initial amount of life cover reduces each year so as to closely or match the outstanding capital debt of your mortgage. Again, critical illness an be included along with life cover.
Low Cost Mortgage Endowment
Details of how this arrangement works have been provided under the 'Types of Mortgage' section.
Critical Illness
A very high proportion of people who suffer heart attacks, cancer, strokes and other such conditions survive them for many years. Finance will still be needed to pay the mortgage repayments. This cover means that your mortgage could be paid off on diagnosis of any of the conditions specified in the policy.
Many life policies allow this type of arrangement to be included as an additional benefit although stand-alone arrangements are available.
Premium Waiver
Choosing this option means that the life company may meet your premiums should you become unable to work due to illness. This would prevent your policy and life/Critical Illness cover from lapsing.