how do mortgage companys calculate affordability?

f1slikki

Hi there, any help or advice would be gratefully received.

I am looking at a mortgage probably with Abbey, fixed rate of 3yrs at 4.19%.
mortgage is for £109,125 my dilema on this is whether to pay over 25yrs or less, monthly figures would be as follows:
25yrs £590, 20yrs £675, 18yrs £723 or 15yrs £821 per month.

my monthly household income is £2300 and I dont have any finance or hp just the normal utility bills therefore I just feel that if I can take out the least amount of time on the mortgage then all is good however I dont know how mortgage companies look at this.
I was advised (not from a professional/ifa) that the mortgage company have restrictions on how much free cash you have after mortgage & utility bills have been met and this is what is hindering my decision.
I dont know if I applied for mortgage on 15yrs & was declined due to affordability whether the mortgage company would be happy to re-look on an increased term.

sorry for this being long winded & hope it doesnt seem a silly question.

many thanks in advance.

kazd

What you would be better off doing is taking it out over 25 years and then overpaying. The end result would be the same as you would clear your mortgage earlier but at least you aren't fixing your payments at a high level which may or may not become difficult at a later date.

f1slikki

hi there thanks for your reply.
I understand what your saying & it makes sense I am a FTB (as you probably worked out yourself) so I dont fully understand how you go about making overpayments as i'm sure the mortgage I looked at with Abbwy said something about 10% overpayments, would this be what I'm needing to look at?

many thanks again.

N20Y1D

f1slikki wrote: »

hi there thanks for your reply.
I understand what your saying & it makes sense I am a FTB (as you probably worked out yourself) so I dont fully understand how you go about making overpayments as i'm sure the mortgage I looked at with Abbwy said something about 10% overpayments, would this be what I'm needing to look at?

many thanks again.

Yep the 10% overpayments mean you can pay 10% of your monthly payment, so on a £600 mortgage the most you could pay on top of the £600 would be £60.

I think HSBC allow 20% overpayments so might be worth looking it.

f1slikki

cool that makes sense now, what a whally I am.
have to look into it a bit further then and see what looks best.

many thanks for replying once more, can I also check though if anybody out there knows if there is a certain percentage of free cash that the mortgage companies have to leave you with after your mortgage & utility bills have been taken into account?
someone told me that you had to have at least 1/3 of free cash to be eligible for the affordability criteria & this is what may make my decision on the mortgage term ie, 821 on a 15yr mortgage is more than 1/3 of my household income without taking into account council tax,electricity, food & fuel.

many thanks

GGGG

kazd wrote: »

What you would be better off doing is taking it out over 25 years and then overpaying. The end result would be the same as you would clear your mortgage earlier but at least you aren't fixing your payments at a high level which may or may not become difficult at a later date

This is good advice, as the longer the term, the lower your monthly MINIMUM payment; if you are allowed to make overpayments (up to 10% is common, but be aware of the terms & conditions as lenders vary in their preferred method of collection; some may accept monthly, some want an annual sum) you can do so as your circumstances allow.Make sure you fully understand your chosen lender's rules before signing up!
The "Affordability Calculations" you refer to generically means the amount you have left from your income after regular commitments (ie loans, credit & storecards, etc.,) have been paid. This can also include Council Tax, maintainance to an ex-partner, etc., too. What the lender is looking for is that you have an adequate "cushion" from which to make your mortgage payments. At present, with the BoE base rate historically low & mortgage repayments cheaper than for a considerable time, they need to establish that a borrower could CONTINUE to afford their mortgage repayments should the rate rise to, say 7%. In view of their recent experiences with toxic debt ( & I believe it's mostly their own fault!), most have rejigged & refined their lending criteria to avoid a repeat in the future, hence the move away from Income Multiples as a guideline to the Affordability model now common.

Apologies for rambling on...:silenced:

f1slikki

thanks again and you were not rambling on, I think i'm understanding all this mortgage lark alot better now, why pay an IFA when there is some fab people on line here who tell you in plain english and are really helpful.

many thanks again i'll check out the T&C's on the Abbey mortgage that I was looking at and hopefully I can go from there.

thanks again.

dimbo61

What they take into account is your income, how much you want to borrow so say 3x your income, type of job and how safe ( dentist/actor ! )
Other credit debts, loans,Credit card bills,CCJ,s
Credit history, DEPOSIT, type of property you are buying
100% mortgage on 1 bed city centre flat !!!
Lots of other factors Interest only or repayment and affordability.

Trying_to_be_good

N20Y1D wrote: »

Yep the 10% overpayments mean you can pay 10% of your monthly payment, so on a £600 mortgage the most you could pay on top of the £600 would be £60.

The 10% overpayment normally means an annual 10% of the MORTGAGE BALANCE (i.e. about £10,000 per year), not of the monthly repayment (which would be 12 x £60 = £720 per year). That's a significant difference! Check what the terms and conditions for your mortgage are.

f1slikki

thanks again for your reply.
in relation to your reply my household income is £2300 per month- normally I do a fair amount of overtime but I have not included this due to which the £2300 is basic amount bring home. the income multiple is just under 3x.
I have been in same job for over 10years & as far as I know it is very safe this is the same for OH.
we dont have any loans/hp or credit card debts as all paid off, have around £4k remaining on car finance which I am paying off just now & I will not apply for the mortgage until this has been cleared. hence me saying I would have no bills other than utility.
I have checked on experian for credit rating and both myself & partner are over 770 showing in fair & good categories.

the bad point is i'm looking at a new build flat have 25% deposit which satisfies their criteria as far as I know.
I am looking at a repayment mortgage.

thanks and I hope this helps.

many thanks

GGGG

Good for you, having a 25% deposit! As I mentioned in another thread, don't be afraid to ask the developers for a BIG discount; newbuild flats especially have a large profit margin built in, so there's often plenty of room for manouevre, & lots to choose from.....buy with your head, not your heart!