How much can I borrow?
Borrowing used to be based on a simple formula: lenders would take your income, then multiply it by up to five and a half times (or up to three and a half times for a joint application) to determine how much you could borrow.
This is no longer the case, and lenders have become much more cautious since the financial crisis of 2007-08. They are now obliged to assess your ability to repay the mortgage under rules brought in by the Financial Conduct Authority in 2014. This means they don’t just look at what you earn, but also your monthly expenses and how that might change in the future. Thus, there are three key areas that lenders look at when assessing what they will lend to you: your income, your outgoings and possible future developments.
How much can I afford?
One of the first things our advisors look at when we meet you is the money you earn and how you spend it. We do this to build up a picture of what you can afford, so we can get you a decision in principle. Later in the guide we will take you through all the costs of buying a house step-by-step.
Income: Lenders will look at your basic salary plus any overtime or bonuses. They will also consider benefits, pension income, investments, child maintenance or income from an ex-partner.
Outgoings: You’ll need to tell us about what you spend on basics like bills – utilities, council tax, broadband, phone, insurance; credit card payments; loan repayments; other committed expenditure such as gym membership and childcare; living expenses – groceries, eating out, clothing, entertainment, holidays. It is important to give an accurate picture of your outgoings as you need to submit 3 months of bank statements when you apply for a mortgage and lenders will query any large outgoings not already disclosed.
Lenders will “stress-test” whether you could still afford to pay your mortgage if interest rates increased or you or your partner were no longer working (if you fell ill, took a career break or had a baby, for instance).
Guarantors – how they can help you borrow more
If you’re struggling to take out a mortgage on your own but you don’t want to get a traditional joint mortgage, there is another option – a guarantor mortgage.
This means that you take out a mortgage – everything is in your name and you own your property – but you have someone else there as a backup. That person will underwrite your home loan. In practical terms, it means that if you can’t pay back your mortgage, they have to pick up the tab. Guarantors tend to be direct family members (parents, grandparents or siblings), but they can be anyone who is prepared to commit to paying your mortgage should you be unable to. The lender will look at their financial situation as part of your application, allowing you to borrow more than you could on your own.
Getting a decision in principle
What is a Decision in Principle?
Before you can put in an offer on a property, you need a mortgage lender to confirm that it is prepared to lend you the money. This is called a mortgage or decision ‘in principle’.
To get assurance on what you can realistically borrow, you need to complete a mini application with your mortgage advisor to submit to a lender. The lender will take the following factors into account:
- The monthly repayments you can afford based on your income, expenses and other factors.
- Your credit history. Most lenders will perform a “soft” credit check(link to credit referencing) from one or more credit referencing agencies.
- Other lender specific criteria, such as age of borrower, property type, property location.
A Decision in Principle (DIP) is also sometimes referred to as an Agreement in Principle (AIP), Mortgage in Principle, Mortgage Promise or Lending Certificate.
How to get a Decision in Principle
The first step is to meet with your mortgage advisor. They will ask you about your circumstances, including your incomes and expenses, your credit history and the deposit you have available.
The advantage of using an impartial mortgage advisor is that they can use the information provided by you to them search through thousands of mortgages and find the best deals available for your circumstances. There are over 10,000 different mortgage products available, so it’s great to have some help in narrowing down the field. If you were to speak to a bank or building society, they would only be able to offer you products from their own product range, usually only 5 to 10 different mortgages.
The options will be narrowed further once you decide on the type of mortgage (link to mortgage types) you would like to take out.
What if my DIP gets declined?
First of all, don’t worry, there are many reasons why a DIP may be declined, and it does not mean you can’t get a mortgage from another lender. Some of the most common reasons for a DIP to be declined are:
- You are not on the electoral register. The lender will find it hard to verify your identity if you are not on the electoral roll.
- Issues with your credit record. Your credit history may not meet the lenders’ criteria. It may just be a minor blemish or something you are not aware of.
- You have taken out a payday loan. Some lenders will not consider you if you have taken out a payday loan in the last few years.
- Your debt is too high. The lender may feel that debt repayments are too high for them to lend to you.
- You may not fit the lenders underwriting criteria. It may be the property type, the area, your age or your job.
A DIP is not a guaranteed mortgage
It is important to realise that having a DIP is not a guarantee that the lender will offer you a mortgage for the same amount.
The most common reasons for this are:
- Your circumstances have changed between DIP and full application.
- There has been a change in your credit rating.
- The property type has changed.
- Your available deposit has changed.
How long does a DIP last for?
Each lender has their own rules for the mortgages in principle, but most DIPs are valid for a period of 60 to 90 days.
It is usually possible to request that the agreement is renewed, but this may involve a new soft credit check being carried out.
Budgeting to buy a property
If you’ve already been to see one of our advisors, you’ll have a good idea of what you can afford and how much you’re able to borrow. However, the mortgage and repayments are only the beginning – there are many different costs involved in buying a home, and you need to take all of them into account when budgeting for a home purchase. To give you a more complete view of the financial elements, we’ve broken them down into: upfront costs, mortgage costs and maintenance costs.
Upfront costs (what you pay before you move)
Deposit
This is quite possibly the most important payment in the property buying process, as it is your contribution towards the price of the property you are buying. You typically need to put down at least 5% of the purchase price to get a mortgage – but the more you can afford to put down as a deposit, the better.
A higher deposit generally provides lenders with more comfort over your borrowing circumstances and can allow them to offer better rates. With deposits of 40% of the property price or more, interest rates for borrowing the rest of the money become much lower.
Stamp Duty / Lands and Building Transaction Tax
If you spend more than £145,000 in Scotland on a property, then you will be taxed on that purchase. In Scotland, it is called Lands and Building Transaction Tax (LBTT) but is also referred to as stamp duty. You don’t have to pay it before you buy your home, but you do need to know you have enough saved to pay it once you own your property: you have 30 days from the time you’ve bought your property to pay it. The tax is between 2% and 12% of what you paid for your property, so will vary depending on the purchase price.
Surveys
Once you have a Decision in Principle (DIP), your lender will check that the property you’re buying is worth the price you’re paying. They may use the valuation carried out in the Home Report produced by the seller, or, more likely, they will arrange a mortgage valuation (which you will pay for). You can then decide if you want to get your own surveys to find out what sort of condition your future home is in and how much it might cost to repair any areas that aren’t up to scratch. Your options are:
A Home condition survey – the cheapest and most basic survey, suitable for new-build and conventional homes, but not useful for spotting any issues with the property.
A Homebuyer’s report – a more detailed survey looking thoroughly inside and outside a property. It also includes a valuation. You might be able to get the valuation and homebuyer’s report done at the same time to cut costs.
Building or structural survey – the most comprehensive survey suitable for an older building or one that’s not a conventional build – such as a timber construction or a house with a thatched roof.
Legal fees
You will normally need a solicitor or licensed conveyancer to carry out all the legal work when buying and selling your home. In Scotland, you’ll need a solicitor to put in an offer on a property; elsewhere you do this through an estate agent. Solicitors are responsible for negotiating and checking the contract, organising the transfer of the Title and money and conducting searches on your property (which basically means checking for any local plans or problems that might affect your property).
Legal fees are typically £850 – £1,500 including VAT, but we can get quotes for you.
Electronic transfer fee
The electronic transfer fee covers the lender’s cost of transferring the mortgage money from their account to the account of the seller’s solicitor. It usually costs around £50.
