25/11/2020 0 Comments
How do banks calculate mortgage affordability?
When determining a mortgage, lenders use different criteria to decide on the amount of money they are willing to lend. All lenders are compelled to follow specific Central Bank rules when doing this.
How much can I borrow for a mortgage?
In the past, mortgage lenders based the amount you could expect to borrow on typically around 5 times your annual income. Today the normal maximum mortgage level is capped at 3.5 times gross income; however in certain cases lenders will issue exceptions.
Nowadays, lenders will start with your income and also look at a number of other factors that could have a bearing on your ability to repay your mortgage every month.
They will assess what level of monthly repayments you can afford after taking into account various personal and living expenses as well as your income.
The lenders will also look ahead and stress test your ongoing ability to repay the loan.
They will take into account the effect of a possible Increase in interest rates and other changes in your lifestyle such as having a baby or taking a career break.
How much of a deposit do I need for a mortgage?
You need 10% of value of the mortgage, or 5% if you are using the help to buy scheme.
How do variable mortgages work?
A variable rate mortgage is a mortgage where the interest rate is not fixed for the duration of the loan. Instead it can fluctuate in line with ECB rates. The lender will notify you in advance of an interest rate change)
What is a fixed rate mortgage?
A fixed rate mortgage is a home loan where the interest rate is kept the same for an agreed amount of time.
Is a fixed or a variable mortgage better?
Unfortunately it is not that simple. Each type will suit different needs. See our pros and cons below to decide which type of mortgage works best for you.
Fixed rate pros
- Your interest rate remains the same so this means that your mortgage repayments will remain fixed for the length of the fixed rate period.
- You are not subject to fluctuating interest rates.
Fixed rate cons
- If the lender’s interest rates drop, you will miss out on lower repayments as your rate is fixed.
- If you decided to leave a fixed rate mortgage, there may be costs associated with this.
Variable rate pros
- If interest rates drop, your mortgage repayments drop in line.
- Flexible options such as adding lump sums or increasing your payments. Either of these options will save you paying interest and help you to repay your mortgage quicker.
Variable rate cons
- Your repayments could increase significantly if interest rates increase.
- You may not know what your mortgage repayments will be from month to month. Being unsure of your major outgoings can make it difficult to manage your budget.
For more information on any of the above please see our Mortgage broker page today.