Mortgages

A mortgage is a loan from a Bank, building society or other financial institution. The loan is secured by a property, be it a House, flat, apartment an so on. The word mortgage is used often when what is actually meant is a mortgage loan. There are many factors to consider before you apply for a mortgage and we will discuss some of these in more detail below.

How much can I borrow?

How much an institution is prepared to lend you will vary from place to place and also the current economic climate has an affect too. If your old enough to remember the glory days before the 2008 property crash and world financial crisis then you may remember some places offering up to a whopping five times your salary. So for someone earning £30,000 a year that equates to a maximum mortgage loan of £150,000. I think these days your more likely to get up to three and a half times your salary as a maximum so on the same £30k salary that equates to £105,000. To be honest I personally think five times was way too much and people over stretched themselves which the lenders were happy to do at the time and that’s really what caused the global financial meltdown. Anyway way enough about that back to the mortgages.

The next thing to consider is what monthly repayment you can actually afford. To work this out you will need to total up all of your outgoings on any existing loans, credit cards, car purchases, household bills and so on and the spare money that you have left should more than cover your potential monthly repayments. I would strongly suggest that you have enough spare money each month to cover two to three times the potential mortgage re-payment as if interest rates spike your monthly re-payment will probably rise too. I always think to err on the side of caution and make sure you have thought about how you would manage in a worst case scenario.

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After you’ve worked out how much you can afford to repay and how much loan you can potentially get you will need to start looking round for the best deal you can find. (Our mortgage comparison tables can help you with that.) If you want to work out your monthly repayment from the interest rate and loan amount you can use our mortgage calculator to help you out there.

The other thing to consider is what loan to value (LTV) you will require. The loan to value is the percentage that the mortgage loan is of the total value of the property you are looking to buy. For instance, you are looking to buy a house for £130,000 and you have a £35,000 deposit, therefore you need a £95,000 mortgage loan to buy the property. To work out the loan to value you divide £95,000 buy £130,000, (This is the loan amount and the total value of the property) which comes to 0.7307. Then times this value by 100 and you have your LTV of 73.07%. So you can look for a mortgage with a loan to value of 73%. Typically most offer mortgages with a loan to value of anything from 65% to around 90%. There were times when 100% mortgages but they are few and far between these days as the financial institutions are more risk adverse than before the crash of 2008. I’m sure in a few years time when the economy and housing market pick up some they will make an appearance again but I would always suggest to avoid a 100% mortgage and even a 90% mortgage if you can. Try to make your maximum LTV around the 80% mark as this will give you a bit of a cushion if times get tight.

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