What are my limits when borrowing for a mortgage?

There are many factors that govern this but in essence the lender will examine your personal circumstances to assess your credit worthiness, measuring this against your income, the amount being borrowed and the value of the property being purchased.

Your Income is used to calculate how much you can borrow, or how much you can afford to borrow and is usually calculated by multiplying your yearly salary three times or three and a half times depending upon the lender. This multiplication factor of your annual income also applies to joint mortgages and therefore joint income. When joint incomes are being assessed it is not uncommon to see different variations of the multiplication rule being applied. Examples include a slightly lower multiplication factor i.e. 2 / 2.5 or one of the incomes receiving a higher multiplication factor than the other. Each mortgage lender will apply their own rules and they differ between lenders.

The value of the property is relevant to the amount being borrowed which in many cases can be as high as 75% of the total value. It is possible to obtain higher loan to value ratios, 90%, 95% and in some cases 100% mortgages but it is likely there will be extra costs and higher interest rates associated to these mortgages.

Other factors taken into consideration include the amount being borrowed, the area the property is located and projected future values of housing in that specific area.

The key areas remain your income and the amount you can comfortably afford. It is essential that when considering a mortgage and more importantly the amount you have to repay each month, that you don’t forget other essential living costs that you will still have to find. Essential living costs include utility payments, gas, electric, water, travelling costs (car or bus journeys to work), food purchases and other family expenses. The mortgage company’s fact finding process should hopefully help you identify the amount of surplus cash that you can comfortably afford to pay towards a mortgage each month and therefore identify how much you can borrow.

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, i.e. consider what type of mortgage you want and then find a mortgage lender you feel can offer you the best deal. 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, nearly all lenders should be interested in offering some form of mortgage to 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 - e.g. 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 has 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.