What size of mortgage can I get?
Before you set your heart on a house and try to take out a mortgage to cover it, you should have a good look at your finances to work out exactly how much you can afford to borrow.
This will in part depend on the kind of interest rates lenders are willing to offer you based on your credit rating, so is not as simple as just working out the value of the house you’re after.
In this guide:
Types of Mortgage
Since different types of mortgage will come with broadly different levels of chargeable interest, the amount you’ll be able to borrow and maintain repayments on will vary.
First you’ll have to decide between an interest-only plan and a repayment mortgage plan.
With interest-only mortgages, your monthly repayments consist only of the interest charged, and you then pay back the capital either as-and-when you can during the term, or at the end.
With a standard repayment mortgage your monthly payments will be somewhat higher, consisting of both a portion of the capital borrowed and of the interest charged.
Then you have the choice between fixed rate, variable and tracker rate mortgages.
Fixed rate plans charge you a set rate of interest for a set term (usually two, three or five years), so you can budget easily from the start, knowing how much you can afford to pay each month and remaining safe in the knowledge that this won’t change.
Tracker and variable rate mortgages come with interest rates that are subject to change throughout the course of the mortgage term, each according to different criteria.
In order to work out what kind of monthly repayments you can afford on your mortgage, you’ll need to review your regular income and expenses thoroughly.
Be careful not to dedicate too high a portion of your spare money each month to potential mortgage repayments as your level of household expenditure will always be subject to change.
Talk to an accountant or mortgage advisor if you are unsure about what you can or can’t afford after you’ve reviewed your finances yourself.
When you take out a mortgage, you need to put down a deposit. The more you can afford to put down up front, the less you’ll have to actually borrow, making the mortgage cheaper by cutting down interest rates in the process.
The loan-to-value ratio is the ratio between the amount you borrow and the value of the property as a whole, expressed in percentage form.
So if the property you want to buy is worth £500,000, and you can afford a deposit of £100,000, then your LTV is 80%. This is considered relatively low. If you can only put down £25,000, then your LTV will be 95%.
If you can afford to pay a larger portion as a deposit, your mortgage will cost you less money overall as not only will you have less to pay off, but also interest rates are lower for mortgages with a lower LTV ratio, reflecting the reduced risk on the part of the lender.
Bear in mind though, that in order to get a mortgage with a higher LTV ratio, you’ll need an excellent credit score as these kinds of loans come with a higher risk of the borrower defaulting.
Your credit rating is incredibly important to your mortgage lender as it will affect not only the kind of interest rates and LTV you’ll be offered but in some case will be the deciding factor in whether or not you’ll be offered a mortgage at all.
There are various ways in which you can check your credit rating for a small fee so have a look online at the various credit checking companies around.
Compare Mortgage Prices Online
You can compare mortgage plans online with Money Expert to see what kind of deals are available at what cost.
You can have a preliminary search in order to see what kind of plan you can afford and once you’ve worked out the size of mortgage you're after, have a closer look at exactly how much, or how little, you could be spending to borrow it.