In this Blog, I wanted to share with you a section from the first chapter in my book “The Self-Employed Mortgage Guide” This is all about affordability and preparing yourself for your mortgage so you have the highest possible chance of buying your dream home!
Chapter 1: Preparing Yourself
After deciding you want to buy a house, move to a new one, the next logical step is to figure out what mortgage you can afford. But don’t just assume you’re going to get a mortgage.
The number of people I’ve spoken to who’ve agreed on a sale on their current property and/or placed an offer on a new property before even considering whether they can get a mortgage is shocking. They’re going ahead with buying a house with no guarantee that a lender will even give them the money they need. The first step should always be to work out how much you can afford, then working out how much you can borrow.
The thing about affordability is there’s no one size fits all. Five different lenders can offer five different mortgage amounts using the exact same figures, as they all have their own interpretation of affordability. Affordability is based on your total income and expenditure. This includes regular outgoings, such as food and utilities, debts, travel, cost of dependants and your projected mortgage payments.
The good news is that you can get a rough idea yourself with a bit of homework. Going through your personal circumstances to prepare yourself and understand what you can borrow.
In the next section, I’m going to teach how to review your own affordability and what you need to consider so you can assess your own mortgage ahead of time and set yourself up for success. When you pass the affordability checks, you’re taking a significant step towards getting your mortgage.
Understanding affordability can also help you to get your dream home rather than just any old home because knowing what lenders are looking for will help you to increase your borrowing power.
Calculating how much you can borrow
As a self-employed person, your income could come from a number of different sources. Mortgage lenders want to make sure your income is sustainable and will continue for the term of the mortgage. They will also go through your bank statements to check your income and expenditure as part of the application process – more on this later. 13
The basics
First, let’s go over some of the basics that affect how lenders see your affordability. To calculate your affordability, take your total monthly income (after tax) and subtract your monthly outgoings (everything you pay out for bills, gyms, loans, credit card, entertainment, etc.). The amount remaining is your disposable income, that is, the amount you can spend. Your monthly mortgage and necessary insurance premiums must fit within this figure.
Affordability example
£6,000 monthly net income – £4,000 outgoings = £2,000 disposable income, so the maximum mortgage repayment and insurance premiums must be less than £2,000, but you should add some sort of buffer for contingencies, so call it £1,600 – 1,800.
The other term sometimes used for your monthly repayment is your mortgage budget.
This calculation is the most important part of your mortgage application. If you don’t have any disposable income, you won’t be able to afford a mortgage.
When looking at your affordability the key is to assess your current and future costs. Work through how your expenditure looks now and then do exactly the same for the future.
Note: when looking at future expenditure or considering moving, make sure you remove your current mortgage or rent costs, otherwise your figures will not be accurate.
First-time buyer’s tip
I know from my own properties that the cost of owning a flat compared with that of owning a four-bedroom house is very different, not least because expenses like council tax and home insurance are relative to the property and the postcode. One thing you can do is to ask friends and family for some idea of what they are paying.
Deposit
The other necessity for buying a house is having money available for a deposit.
Long gone are the days when you could get a 100% mortgage that is, putting down no deposit and having the entire mortgage to repay.
Note: The above is correct at the time of writing this book, but things may change, so it is always best to seek advice from an adviser.
As at July 2017, there’s one lender in the UK that will offer you a mortgage with no deposit. However, your family or friends will need to have the funds to provide 10% of the property’s purchase price, to be placed into a savings account with the lender. Your family gets their money back with interest in providing you keep up with your repayments for the first three years. Speak to an adviser about your personal circumstances to find out if this is relevant to you.
In any other circumstances, you will need a 5% deposit as a minimum and some lenders will want to see proof of it being available at the point of application, so bear this in mind when you are doing your preparation.
The first step towards acceptance for a mortgage is an agreement in principle (which I will touch on later). The mortgage lender will complete a credit check and may request that you increase your deposit. This is what happened to Ayesha and I when we bought our first house together: we applied with a 5% deposit, and the lender came back and requested a 10% deposit before they would lend to us. Lenders have their own criteria, but a general rule of thumb is that the more deposit you have the greater chance you have of being accepted – or at least, that is my personal impression.
If you can save a 10%+ deposit, you will have a greater choice of mortgage lenders.
It’s worth noting that a larger deposit also improves the interest rate. You’ll generally see interest rates decrease with deposits of 15%, 20%, 25% and 35%. However, don’t let this hold you up when it comes to buying a property. If you have a deposit saved, seek advice about your personal circumstances.
If you would like to read the full book follow the link below to buy your copy of “The Self-Employed Mortgage Guide” Today!
Buy it HERE – http://amzn.to/2Cw1yOz
- Your home may be repossessed if you do not keep up repayments on your mortgage
