How Much Can I Borrow?

How Much Can I Borrow?

May 6, 2016

How Much Can I Borrow?

Taking out a mortgage is the biggest financial commitment most people are likely ever to make, so making sure you’re taking out a mortgage that is right for you is vitally important. Knowing how much you can afford is vitally important, and knowing how to reduce the costs of a mortgage can help you stretch your budget to get the loan that you need! Follow our guide to understanding how much you can borrow for a helping hand in the world of mortgages:

Budgeting Your Monthly Repayments

The first thing you need to know in order to understand how much you can afford to borrow is what your household’s net monthly income will be. To calculate your current net monthly income, all you’ll have to do is deduct your monthly spend from your monthly income (make a note of which expenses could be reduced, so if you need to bump up your budget you know where you can make cuts). Now comes the tricky bit; you need to calculate how these expenses will change once you’re living in your new home, taking into account changes in transport, council tax, insurance, maintenance and any other costs that will change.

Use your accounts (or your online bank statement) to work out these changes; when applying for a mortgage, the provider will likely want evidence to back up your estimates. Now that you have your estimated net monthly income, you have an idea of the amount of money you’ll have available for monthly repayments – you can start looking at the total you’ll be able to borrow!

Getting a Good Deal on a Mortgage

Getting a good deal on your mortgage allows you to stretch your monthly repayments further, therefore increasing the amount you’ll be able to borrow. Over the course of a standard 25-year mortgage you’ll find that even a tenth of a percent saved in rates equates to thousands of pounds saved, so doing some legwork before applying is well worth it in the long run.

The first task is to make sure your financial history is up to scratch. Get a copy of your credit report from Experian or Equifax, and use this to diagnose your financial health; are you a stable, reliable customer, or a potential risk? A patchy credit history can often be improved in a relatively short space of time, and the benefit in discounted rates you’ll be offered is well worth the trouble – read our guide to “Understanding Your Credit Rating” to clarify the often poorly understood world of credit history!

Pick the Right Mortgage For You

The type of mortgage that you choose has an impact on how much you’ll be able to borrow as well. A payment plan that suits your circumstances can make monthly repayments easier on you, allowing you to borrow more as a result. There are many different options available from most providers, so with a little legwork you’ll be able to find the type of mortgage that suits you.

Our guide to the “Best Mortgage Options for First-Time Buyers” is a great place to start learning about the different options available to you as a buyer, but the main distinction between mortgages types is between variable and fixed-rate loans. Fixed-rate loans give you the peace of mind that your repayments will remain stable, whilst variable-rate loans allow you to profit if interest rates should decline! There are some interesting variations on these types of mortgages such as offset loans, which allow you to decrease your monthly payments by paying into your savings account, and flexible repayment plans that allow you to over or under-pay your mortgage.

Boosting Your Deposit

                One of the most important factors in determining the amount of loan you can take out is the amount of money you’re able to put in to your deposit. The more you can put in, the cheaper the rates you’ll be offered and the more you’ll be able to borrow: for many people, their deposit is the sum total of their savings. It is possible to boost your deposit, however, with some foresight and planning. The UK Government is running a “Help to Buy ISA” scheme, which allows customers to bank their savings in a regular ISA with the benefit that if the ISA is used to pay for the deposit on a house, it will be increased by an additional 25%! Although there is a limit to the amount you can deposit, the flexibility of this scheme makes it a no-brainer for anyone who’s planning to buy, and offers flexibility if you choose to use the money for something else.

It is also possible to apply for Government help to boost your deposit on certain types of homes, and it can be possible to purchase a new home with only a 5% deposit of your own. Because the added deposit secures you a lower rate on your mortgage you’ll then be able to afford a larger loan than you otherwise would be!