How Much Can I Borrow?

One word you may encounter when applying for a mortgage is affordability. To try to explain this term further, it obviously is determining whether or not you can afford the mortgage, but it is also looking at whether you can afford the mortgage according to the mortgage lender.

Affordability can be a very subjective thing, what one person feels is affordable another may not. This in turn can present a problem for lenders in so much as how they assess one persons ability to afford a mortgage against someone else's ability to afford the same loan.

Obviously they can't distinguish from one person to another so they create their own criteria and apply that to each applicant. With this in mind, do not be discouraged. Shop around, for one criteria may not accept you where another one will.

As an example, lets say a mortgage lender stipulates that you can borrow 3 times your yearly salary minus other loans you have accrued. To break this down simply take a yearly income of 20,000 with other monthly loans of 300. Your yearly loan is therefore 12 times 300 or 3,600.You subtract this from your yearly salary and the figure is 16,400. You then multiply this by 3 to ascertain what the mortgage lender is willing to loan you, a figure of 49,200.

Now don't worry if your income is this and you now don't think you can get a decent mortgage because as I said all lenders are different. For example 3 times is actually probably the smallest amount that most lenders will lend nowadays. A lot of lenders routinely lend in excess of 4 times income and some even lend over 5 times income. Some lenders as in the example above deduct loans and credit cards other lenders ignore them completely. So it is important to do research to find the lender that has a lending policy that fits your circumstances perfectly.

There are a few lenders that do not work on the multiple times income principle at all. These lenders work affordability in a completely different way. These lenders may use a system of allowing a certain percentage of your income for borrowing per month. This works quite simply say your income is 20,000 and they allow you to spend say 40% of your income on debt but you already have a car loan costing 2400 per annum this is how it would work:- 20,000 times 40% equals 8,000 less the car loan of 2,400 leaving you with 5,600. This then means that these types of lenders will allow you to borrow from them as long as the new mortgage does not cost you more than 5,600 a year of 460 per month.

Of course peoples circumstances can change and it is impossible to pinpoint exactly how much one can afford. However lenders must set some sort of perameters so as not to apear to their regulating bodies to be lending money irresponsibly.

Also it should be taken into acount that although you may feel that you can afford to borrow a certain amount in your present circumstances, factors such as future fluctuations in interest rates may not see you financially as secure later on down the line. Not only are these policies protecting the lenders, they could invariably be protecting yourself as well.

So when getting a mortgage it is always advisable to check your own affordability and make sure that any mortgage you arrange now is also affordable after a few percentage point rises come in. So if they haven't already done it ask your mortgage adviser to quote you the same mortgage with a three percent rate increase in it and see how affordable it is then, if you find it still affordable then you should be safe to proceed.