How Much Mortgage Can I Afford?

Applying for a mortgage can be a daunting task for prospective home buyers. The home loan industry has changed dramatically since 2008; home loan companies such as banks and building societies have strict regulations when it comes to buying a home. Before you even step into a starter home it’s a good idea to know how to get a mortgage and to know actually how much of a home loan can I afford? There will be many hoops for you to jump through before your application gets serious attention from the home loan provider.  What is a mortgage?  In French HOME LOAN literally translates into death pledge, I think many lenders prefer this definition of the standard home loan. The lender will get his money regardless if you die. But, today home loans are from a bank or other lender. The home loan is a secured debt so effectively the lender owns the property title until the debt is paid in full. Mortgage loans are normally long term and require a lot of thought about your future plans before deciding to enter into a binding contract with a lender.   How much mortgage can I get?  This is one of the first things you need to understand, the home loan amount you require is partly based on the value of the property you wish to purchase. But, the lion’s share of the home loan will be assessed on your income. Lenders will make an assessment based on your basic salary, regular overtime and any other paid work with a reliable steady income. Other income streams can be from part-time work such as freelancing or any other dependable income stream. The lender will then means test your ability to pay the monthly home loan repayments. Means testing will include a realistic assessment of your other entire monthly outgoings from your salary. Credit card payments will be taken into consideration, having too many credit cards with high credit availability will not help your mortgage application unless you can demonstrate the ability to meet the payments together with your proposed home loan payment. Your household bills will also become a factor in your mortgage application; home loan lenders have a good idea of the likely household expenditure for the house you wish to buy. The lender will assess your electricity consumption, water usage, gas consumption and finally, the tax levied on the property by the local council. If you own a car the lender will also assess your monthly fuel consumption, annual road tax, Insurance and finally car loan payments if your car is being purchased through a loan.  Did I mention that applying for a mortgage is a daunting task for most prospective home purchasers? The requirements don’t stop with the above, the mortgage lender then moves to stress testing. I can hear what you’re saying, what is stress testing? I’m already stressed with the application process! Stress testing is an assessment of the purchaser’s ability to pay the monthly mortgage payments should something change in the market. Changes in the market almost always refer to higher interest rates, can you afford the monthly payment of your mortgage if the interest rates increase by 3%? Keep in mind that interest rate hikes also affect your credit card payments. Stress testing is a crucial part of any mortgage application, to be honest, you need to consider all of this information, ultimately if you miss mortgage payments your home will be at risk and the probability of a lender granting another mortgage to the delinquent purchaser is zero. Ok, we have jumped through a lot of hoops already and we must be getting close to a decision on our mortgage application. Not so fast, next is the credit check. Credit agencies such as Experian and Equifax record every payment you make against any loans you have. Lenders are unforgiving if you have a poor credit history. If you have been delayed with your credit card payments or car loan this could cause a problem with your mortgage application. If you have missed a couple of payments completely on any of your loans most lenders will decide on the risk before rejecting your application. You will find some lenders are totally risk-averse and mortgage applications are rejected for the slightest error made. Where other lenders will take the risk and offer a mortgage based on a slightly higher interest rate. Using a mortgage affordability calculator is a great idea before you enter into your application process, it will save you time and energy and give you a good idea of what you are likely to be able to afford. But, only enter accurate information, mortgage lenders are not fools, so don’t fool yourself.  Improve your credit rating Knowing your credit score is important when applying for a mortgage or any other loan. There are three main credit agencies, Equifax, Experian, and TransUnion. You can write to these companies and request a copy of your credit file, it’s free. Alternately you can check online, the only difference is the online version is paperless. Credit recording agencies cannot refuse to give you your credit file if you find something that is not correct on your credit file you must dispute the information without delay to prevent adverse credit history. What information do credit agencies hold about me?   Name and address with your date of birth   Any credit application you have made, credit cards and loans   Missed payments   Court order made for repayment of loans   Voluntary arrangements with a lender   Bankruptcy By law, it cannot contain personal information. Such as medical records, parking fines, other court actions other than financial proceedings. If you have local tax arrears this information will not be included. How long does the credit history stay on the report? In general, it is there for six years before being deleted. You can improve your credit by:   Making payments on time   Check regularly for incorrect information on your file   Take I higher interest rate credit card and pay the balance in full every month to avoid charges   Make sure you on the electoral roll   If you are linked to a person with adverse credit correct this information   Reduce the debt on your credit cards, lenders are risk adverse and too much debt will negatively affect your home loan application   If you move home regularly this makes lenders nervous, set some roots and stay in a home for a while to improve your risk   Take advice from professional debt management councilors, they are motivated to keep you living within your means   Do not be tempted to employ a credit repair company, you can do this work alone for free   Never lie on any credit application, if the lie is found out and cannot be explained as an error you will be blacklisted Report mistakes on your credit file, you can contact the company directly and ask why they have entered incorrect information about your credit. Send a letter and copy the letter to the relevant credit agencies. Follow up, don’t expect everything will be fixed automatically.  How to get a home loan  Depending on your employment circumstances you will need to provide some mandatory information. If you are employed you will need to provide at three months’ pay slips and six months of current account bank statements, a driving license, passport or utility bill with your name on it. Evidence from the tax authority that you have paid tax on your declared income (P60) will suffice for this requirement. The more information you can provide the better it will be for the lender. If you are self-employed you need to produce 6 months current account bank statements, positive identification such as a passport, driving license, Utility bills with your name as the account holder. A set of audited accounts from your accountant for the past 3 years of trading. If you have other income from another source you will need to support this information with the relevant tax documentation. Be sure that the information you supply with your mortgage application matches the supporting information attached to the application. For instance, record monetary amounts exactly, do not round up or round down, this will delay your application process and create more questions. You may be required to show separately from your bank statement other expenditure like insurance payments for your car and present home. You may also be asked to verify your council tax payments. Many mortgage lenders will want a realistic estimate of expenditure for holidays, special occasions and child care. The lending criteria for mortgages is stringent, this is mainly to protect the consumer, keep in mind you will likely be paying a sizable deposit on your home and your new home will appreciate in value. The lender owns the home until it is paid in full, in all probability if the home is repossessed the lender will not lose a penny (maybe lost interest over the term of the loan). Most of these measures are to protect the homeowner; they may seem like a pain when going through the mortgage application process but ultimately you will benefit.  What mortgage is best for you?  There are a number of different types of mortgage available so which one will suit your needs best?   Repayment mortgage, this mortgage is often the mortgage with the highest monthly repayments. Over the term of the loan, you will be paying each month interest on the loan and a small percentage of the capital. As the loan extends for many years you repay more capital than interest. At the end to the mortgage loan term, you will have paid the mortgage completely and the title of the property will be transferred to your ownership.   Fixed rate mortgages are a perfect way of securing your monthly payment for a number of years, this will provide you with some security knowing that if the markets crash your interest rate will remain the same. After the agreed fixed rate period your mortgage will automatically default to the lender’s variable interest rate. Most lenders are prepared to negotiate a new fixed rate scheme to keep your business. You also have the option to search the market for a better rate and swap your mortgage to another lender.   Standard variable rate mortgage, this type of mortgage has no deals or special offers to entice borrowers to their product. The interest rate fluctuates with the market and provides no security for the buyer. Many years ago this was the only option and during the early 80s interest rates spikes to 15% overnight. It was a terrifying experience for many homeowners.   Discounted rate mortgage, this one is self-explanatory; the interest is discounted over an agreed amount of time. Your payments will fluctuate up and down with interest rate movements. It’s a great mortgage if you don’t mind some exposure to fluctuating interest rates.   Interest only mortgages, This type of mortgage gives the borrower the lowest monthly payment because you will only be paying the interest charges on the loan. Through the term of the mortgage, the capital will remain the same, the borrower needs to make a plan to pay the eventual capital. This may be done in the form of an insurance policy (once termed as endowment policies). If you intend on moving home frequently and taking the accrued equity from each property to pay down the capital then this mortgage is a good option. However, history has shown us that insurance policies to pay off a mortgage can be a risky strategy for the borrower.   Flexible mortgages, this type of mortgage allow the borrower to overpay or underpay the monthly repayment, and in some cases, the lender will allow for repayment holidays for a few months. This may seem like a great option to underpay but keep in mind your interest is compounding making your loan bigger than you would have thought. The rates are variable. I can’t think of one good example of why a borrower should select this type of mortgage.   Tracker mortgages, this particular mortgage tracks the interest rate of a particular lender, say the bank of England. The mortgage will vary with the prime bank’s interest rates giving the possibility to pay more or fewer repayments each month. Tracker mortgages are very similar to capped and fixed rate mortgage schemes which suit some home buyers.   A reverse mortgage, this is one to be cautious of and you should seek legal advice and fully understand the potential ramifications of using this product. If you are aged 60 and over you can release equity from your home. You can avail cash lump sum payments that may be very handy in an emergency. However, the lender who is using your property equity to loan you cash is charging interest on your own money. It gets worse! You will need to repay the loan in full within a six month period. If you cannot repay the loan you will need to sell the property to repay the loan. The lender will inevitably take a lien against the property at the time he is loaning you your own money. In my opinion, this practice of loaning cash should be made illegal as many elderly folks are duped into easy cash loans.  Mortgage insurance  You will be required to ensure your mortgage, but what is mortgage insurance and how does it protect the borrower? Generally speaking, mortgage insurance does not protect the buyer, it protects the lender by ensuring that the mortgage will be paid if the borrower defaults. However, mortgage insurance or protect as it is sometimes called enables the borrower to attain a mortgage that he or she would normally not be able to attain. Invariably the cost of the insurance policy will be added to the loan of the mortgage and increase your monthly repayments. In some circumstances you can avoid mortgage insurance by increasing the deposit you make on the property, most home buyers choose to pay a twenty percent deposit and this does not give the lender enough comfort should something go wrong with the loan payments. This is why they insist on mortgage insurance. Conventional loans will need mortgage insurance and often the monthly premium for the insurance is calculated on the amount of risk the borrower could represent. If the borrower has a good credit score the insurance premium will be lower. There are all so some circumstances where the mortgage lender will allow the insurance policy to be canceled after a period of time. If the borrower has maintained a meticulous payment record and the mortgage is advanced then the lender will consider releasing the borrower from paying the insurance premiums. Mortgage payment protection for the borrower, you can take out insurance policies that will cover the monthly payment of your mortgage if you become too sick to work. The mortgage payment protection insurance (MPPI) will also cover the borrower in the event of redundancy. The main three mortgage protection insurance policies cover accident and sickness only, which covers long term illness or severe accident preventing the borrower from working. You may wish to opt for the unemployment insurance that covers your mortgage repayments should you be made redundant. Finally there is an option to purchase mortgage insurance that covers sickness and redundancy, clearly, this will be the most expensive option but the long term benefits of this policy are advantageous to the borrower.  The cost of mortgage insurance protection policies varies with age, if you are in your mid-forties you can expect to pay around fifty pounds per month for insurance cover. Younger borrowers can expect to pay in the region of thirty pounds per month for the same cover. The cover is not really expensive when you consider it can save you from having your home repossessed.  How much will insurers pay out if I make a claim?  It depends on the level of insurance cover you are paying; typically the insurance protection will pay unemployment for up to two years. If you have selected the correct premium and cover for your circumstances the policy could pay the whole of the monthly repayment or part depending on what you selected at the policy inception. The insurance company will start paying your mortgage payments after the initial waiting period; this can be thirty days to one hundred and eighty days. Again this will have been discussed with you before you signed for the policy. Before you take out your mortgage insurance cover you should investigate some of the other products insurance companies provide for covering payments. Critical illness may seem like an unwanted expense but in the event of becoming critically ill, you can find yourself with your mortgage being paid in full by your insurer. Taking these policies at an early age will keep the premium s down while you enjoy the peace of mind the insurance policy gives.  Closing costs What are closing costs and it is it my responsibility to pay these charges? Closing costs are the charges levied against your mortgage at the time of transfer of title from the lender. They vary from location to location and can be significantly high. Closing costs can run as a high as 5 % of the value of the initial purchase value of the property. So, if your property was 150,000 dollars expect to pay 3,000 dollars in closing charges. The charges are levied against the property for the following items:   Recording Fees   Transfer of title fees   Origination fees   Pest control inspection   Property tax   Survey Fees   Title searches   Environmental searches   Lenders policy insurance   Lead paint inspection   Homeowners insurance   Prepaid interest These are just a few of the items that make up the final closing costs of your mortgage.  Final comments regarding getting a mortgage  For most people who want to own a home, the mortgage is the option available to them. Mortgages work well as long as you keep up with the monthly repayments and don’t default. Your mortgage is likely to be the single largest debt you will ever take on in your lifetime. Plan for the future, select the home you would like in the area you like, apply for the mortgage and enjoy your new home. If the mortgage application is rejected find out why. Don’t panic there are plenty of lenders in the market who would like your business albeit at a slightly higher interest rate if you have a little adverse credit history. Make sure to keep up with the payments on all of your loans, this will keep your credit file in good shape should you require additional finance in the future. Please call us at 904.513.8000 and for more great information check out



Andrew Saltman

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