Understanding What You Can Afford as a First-Time Buyer
When it comes to first time buyer mortgages, one of the biggest questions is: ‘How much can I borrow?’. Here is what lenders look at when deciding how much they are willing to lend so that you can feel more in control and understand the process a little better.
Income
First comes first: what you earn. Your income forms the basis of what lenders consider when deciding how much you can borrow. Generally, mortgage lenders use something called the loan-to-income ratio, which is the amount you want to borrow divided by how much you earn. The most you can borrow is usually four-and-a-half times your annual income, although this cap will vary from lender to lender.
If you’re buying a property with someone else, such as a partner, your combined income will be taken into account. This, of course, will increase the amount you can borrow. If you’re self-employed, which more and more people in the UK are, lenders will typically require proof of your income for at least two to three years.
Outgoings
Lenders will also look at your regular outgoings to gauge how much you can realistically afford to repay each month. To put it simply: the more financial commitments you have, the less you’ll be able to borrow. This is why keeping debt to a minimum and controlling your monthly spending is crucial when applying for a mortgage.
Key outgoings that lenders consider include existing loans or credit card debt, household expenses such as monthly utility bills and council tax, childcare costs, and car finance payments.
Credit History
Your credit score plays a significant role in determining how much you can borrow as well. A good credit score increases your chances of being offered a larger mortgage at a lower interest rate, while a poor credit score can limit your options. To improve your credit rating before applying for a mortgage, you should pay bills on time, reduce credit card balances, and avoid applying for too much credit. Lenders will also examine whether you’ve had any past defaults, bankruptcies, or County Court Judgements (CCJs).
The Importance of a Deposit
The size of your deposit will also impact the amount you can borrow. Most lenders require a deposit of at least 5% of the property’s value. However, the more you can save for a deposit, the better the mortgage terms you’re likely to be offered. A larger deposit not only reduces the amount you need to borrow but can also lead to better interest rates, making your mortgage more affordable in the long run. So, get saving!
Why Work with a Mortgage Broker?
Navigating mortgages can be overwhelming, especially for first-time buyers. This is where a mortgage broker comes in. They can help you assess your finances, understand your borrowing limits, and provide you with tailored advice. They can also help to save you money, as you are much more likely to be approved for a mortgage with better terms – making the broker’s fee more than worth it.
To find out more about first time buyer mortgages, get in touch with an experienced mortgage broker today!