The Question
I am saving for my first home and deciding whether to make my move now or wait until I have saved more money. I would like to find out how lenders decide who they lend money to – and how much – so I can be one step ahead of the game.
Currently I have £5,000 saved in a Lifetime ISA and I earn £28,000 a year. I am 27 and buying alone in the North of England.
I have been told the bigger my deposit the easier it will be for me to get a mortgage. But could I get a loan now based on my current financial status? How would a lender assess my income and deposit to help them decide if I am eligible?
Darren’s Answer
Buying your first home is an exciting time! Let me help with the points you have raised.
In terms of affordability, all lenders are slightly different but generally follow similar principles.
They will look at a range of factors that form a picture of your overall financial situation. First and foremost, they will look at your total income, the property value and your deposit to assess whether this is affordable for you.
If you have yet to find a property, your adviser can provide a guide as to the maximum you can borrow which will give you a range when looking at properties. This is vital as the last thing you want to do is find your dream property and then discover you can’t afford it!
Your income
From an income perspective, lenders generally decide how much you can borrow by multiplying your income by a certain number. Depending on the lender this can vary from three times your annual income to 5.5 times. This is based on many factors, such as income and credit score.
Your outgoings
Once your income is considered, lenders will then look at your outgoings to assess affordability.
Your outgoings and expenditure cover a range of liabilities, such as:
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- Financial agreements (loans, credit cards, hire purchase and overdrafts)
- Property costs (such as utility bills and council tax)
- Work related expenses (car, fuel, insurance, phone and internet costs)
- General household expenditure (food, clothes, childcare and school fees)
Gathering the evidence
The lender will ask for evidence of income as well as your commitments, for example:
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- Proof of income – such as pay slips or tax returns
- Bank statements – from all your accounts but focused on where you pay your bills so they can see your expenditure
- Proof of deposit such as a savings statement
- Other – this will be proof of ID and address as well as any other lender-specific documents
Gathering all the documents as early in the process as possible will allow your adviser to provide accurate figures to the lender, which will help when completing the affordability check.
The deposit
In terms of deposits, the bigger the deposit, the better the loan-to-value, which can support your affordability and also give a lower interest rate.
But it will depend on what properties you are looking at as there is every chance you could still obtain a mortgage with a lower deposit.
The first step in your journey to home ownership is to speak to a mortgage broker who can provide a Decision in Principle, which will let you know how much you can borrow based on the above.
Meet our expert…
Darren Polson is head of mortgage operations at Aberdein Considine. He has been writing a regular column for What Mortgage for over two years and is now here to answer YOUR questions.
If you have a question for Darren please email kate.saines@emap.com or leave a message in the comments below.
