One word you may encounter when applying for a mortgage is affordability. To try to explain this term further, it obviously is determining whether or not you can afford the mortgage, but it is also looking at whether you can afford the mortgage according to the mortgage lender.
This can be a very subjective decision and can come down to the individual's perception of your ability to repay. This of course is difficult for the lender when deciding how to assess each individuals ability to repay the same loan.
Obviously they can't distinguish from one person to another so they create their own criteria and apply that to each applicant. With this in mind, do not be discouraged. Shop around, for one criteria may not accept you where another one will.
Some lenders say they will lend you 3 times your salary minus any other financial commitments. Therefore if, for example, you earn 30,000 per year and each month you pay a car loan of 300. By multiplying that 300 by 12, you can see that you pay out 3600 per year for your car. Take this off 30,000 and you are left with 26,400 which your mortgage lender will consider as your annual worth. According to their lending criteria, they will therefore lend you this amount multiplied by 3 which will give you a mortgage of 79,200.
Now don't worry if your income is this and you now don't think you can get a decent mortgage because as I said all lenders are different. For example 3 times is actually probably the smallest amount that most lenders will lend nowadays. A lot of lenders routinely lend in excess of 4 times income and some even lend over 5 times income. Some lenders as in the example above deduct loans and credit cards other lenders ignore them completely. So it is important to do research to find the lender that has a lending policy that fits your circumstances perfectly.
There are a few lenders that do not work on the multiple times income principle at all. These lenders work affordability in a completely different way. These lenders may use a system of allowing a certain percentage of your income for borrowing per month. This works quite simply say your income is 20,000 and they allow you to spend say 40% of your income on debt but you already have a car loan costing 2400 per annum this is how it would work:- 20,000 times 40% equals 8,000 less the car loan of 2,400 leaving you with 5,600. This then means that these types of lenders will allow you to borrow from them as long as the new mortgage does not cost you more than 5,600 a year of 460 per month.
Whilst you may think that your circumstances dictate that you could afford to borrow more money it should be taken into account that there has to be some degree of constraint on behalf of the lenders when loaning money to the public and they have to be seen by their regulators to be conducting their business responsibly.
That said these policies are also there to protect you the borrower and if you try and work within them you should have a mortgage that you can afford both now and into the future. What a lot of people fail to realise when getting a mortgage is invariably in the future the cost of borrowing the money does fluctuate as the interest rates change and if you don't ensure you can afford the mortgage now how will you be able to afford it in the future.
Therefore before you decide that at the moment the money being borrowed is affordable, do your homework and factor in a 2 or 3% increase on the loan and decide whether it is still viable. If the lender has not already done this get them to show you how the repayments would change if there were fluctuations. At least then you can be safe in the knowledge you are covered for the future.
