A Few Considerations to Note Before Choosing a Mortgage

When assessing your borrowing ability, what I found is a mortgage lender will take five key factors into account - your income, existing debts such as credit cards or other loans, the amount of deposit you have available, your past credit record and your employment status.

1. Income

Most mortgage lenders use a method known as an income multiplier to calculate how much they are prepared to lend. A ‘three-plus-one’ multiplier basis allows a lender to advance an amount equivalent to three times the main salary plus one times the secondary income.

The income a lender is prepared to take into account varies. But as a general rule, income that is guaranteed or has been received regularly in the past will be considered. In contrast, income that is not guaranteed, such as occasional overtime, will probably be ignored. The lender will also need proof of your income and will probably ask for recent pay slips or previous P60s - forms from your employers detailing your pay in the past tax years.

2. Existing Financial Commitments

If you have outstanding loans or credit card bills, a lender will reduce the sum it is prepared to lend you based on your income. This is because there is already a financial strain on your household budget and the lender does not you to be overstretched.

How much it reduces the loan amount depends on the size of your existing debts. Mortgage lenders tend to adopt one of two approaches - they will either reduce the advance by the size of the outstanding debt or they will recalculate the permitted maximum loan taking into account the monthly cost of a borrower’s existing credit.

3. Size of deposit

Though some mortgage lenders will allow you to borrow a sum equivalent to 100% of the value of your dream home, deals such as these are the exception rather than the norm. Most lenders require a deposit of between 5% and 10% of the value of the home. The bigger the deposit, the more favourably a mortgage lender will look upon you and a wider range of mortgage deals will be made available to you.

4. Credit History

If you have a chequered personal finance history you find it obtain a loan from a mainstream lender. When considering your mortgage application a lender will check whether you have previous mortgage arrears, have had a county court judgement recorded against you or have a bad credit record.

Some mortgage lenders will tolerate past financial indiscretions provided that you declare to them openly in other words, they don’t find out first - and your explanations are satisfactory.

5. Employment status

Though lenders are more aware of the increasingly flexible jobs market, they prefer to lend to people who have displayed job stability in the past or who can show a defined career path. They are less partial to people who constantly change jobs or who have big gaps in their employment history.

On a final note choosing a mortgage is probably the most important personal finance decision you will take. It is imperative that you get it right by comparing the right type of loan option. Take your time, seek help and advice, and don’t be afraid to question anything you don’t understand.



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