How much can I borrow?
This usually depends on two factors. The first is how much you earn. The amount you can borrow will vary between lenders but the rule of thumb is three to three and a half times your annual earnings. However typical variations would include:
Couple 1: two and a half times both annual incomes.
Couple 2: three to three and a half times the greater income one times the second income.
Some lenders now use more sophisticated credit rating methods, where they examine your income and your outgoings. The idea is that every borrower has unique circumstances. Someone with teenage children and high outgoings can't afford to borrow as much as a single person earning the same salary.
Sometimes people are lent five times their annual income.
The second factor is how much the property you want to buy is worth.
Most lenders will loan up to 75% of the property's value (this is known as the Loan to Value ratio). Some will lend up to 90 or 95% of the property's value. Some lenders will let you have up to 100% ie a 100% mortgage - but you'll pay higher interest rates for this and will probably be forced to buy mortgage indemnity insurance, further increasing the cost.
Depending on the area you want to buy in, the lender may refuse a loan, for example if they feel the property isn't expensive enough for the area.
But bear in mind that what you can borrow is not neccesarily what you can afford. You may be able get a mortgage which stretches your budget to the limit but leaves you in trouble when you have to pay the other costs involved in buying your home and its future running costs
Some lenders will want to estimate this by checking your average outgoings eg your household bills, any debts etc. Some will get you to fill in a detailed questionnaire either by hand or on the phone or online etc.
How long are mortgages usually for?
Usually 25 years. But this is only because that was the traditional length. You can get a mortgage for any length. 15 or 20 year mortgages are fairly common. The reason why people would want a shorter mortgage term is that - despite seeming to be more expensive, i.e. the monthly payments are higher - at the end of the day you'd be paying a lot less interest over the length of the mortgage.
What is a mortgage in principle?
This is a conditional offer made by a mortgage lender that - provided the information you give them is correct - they will "in principle" give you the loan you have discussed with them.
It's very useful to have one before you even start looking for a house to give you the edge over any competition. Having one means you should be able get the actual mortgage quicker when the race to buy your chosen home begins.
Knowing what you can afford will help you narrow your search. You can get this offer in writing to show to Estate Agents and sellers who will see you as a serious prospect and not a timewaster who's interested, for example, in looking around peoples' homes for a laugh.
To get a mortgage in principle you have to go through the same motions as an actual mortgage, ie consider what type of mortgage you want and then find a mortgage lender you feel can offer you the best deal. See How to get a mortgage
You should be able to get a mortgage in principle offered over the phone. It's only when applying for the actual mortgage that the mortgage lender will want to see the proof of your pay etc.
How do you prove your income?
If you're employed: The lender will ask for written evidence e.g. payslips and/or your P60 for the past two years.
They'll also probably write to your employer asking for confirmation. Some lenders may accept income that's not guaranteed e.g. commission, bonuses etc., though this would be exceptional. If you're self-employed: Traditionally this was more difficult and as a result there are lenders who specialise in the self-employed. However nowadays nearly all lenders should be interested in you. You would need to show three years audited accounts. If you haven't been in business long enough then the lender will usually accept a letter of confirmation from your accountant.
What will happen if I don't tell the truth in my mortgage application?
If you lie - eg about a bad credit history - it will very probably be spotted by the mortgage lender and screw up your chances of a mortgage with both the current lender and future lenders. Honesty is the least complicated and best policy
Can I get a mortgage if I have a bad credit rating?
It is not as easy as for someone with a clean credit rating, but it is still very possible. It may be some relief to know that one in four Britons have bad credit and over 3 million have County Court Judgments (CCJ) against their name. Over 2 million people have had mortgages arrears at one point. However, whereas all of these people may have been marginalised in the past, forced to pay high interest and charges, high street lenders are more willing to enter into negotiations than before.
The Mortgage Code Compliance Board have encouraged mainstream lenders to relax their rules and bring those with adverse credit into a position where the high street mortgages are still in their grasp.
Having a County Court Judgment listed against you may mean it is difficult to obtain a mortgage through most lenders. However there are a number of specialist lenders who will lend to people with a CCJ or other credit problems.
What is a redemption penalty?
When you take out a mortgage you have an agreement with the lender. This covers the amount you repay and is set for a particular period.
For example you may have a mortgage for a three year fixed interest rate of 5%.
If you want to get out of this deal before the three years is up you'd probably have to pay a redemption penalty. This is a charge which supposedly compensates the mortgage lender for the time and expense of your leaving.
Some lenders may try to hide the redemption penalties in the small print.
Simply ask your prospective lender what the exit / redemption penalties are. If you're not sure what they mean ask them to spell it out. If you still don't understand you can take it that there's something they might be trying to hide so walk away.