Property renovation: Financing your property

Ned Browne

It used to be simple: a single person could borrow three and a half times their salary and a couple could borrow two and a half times their salary. But, before the credit crunch, lending rules had become far more relaxed. Remember 'no income no assets' loans in the USA? Things didn’t get that bad in the UK, but the subprime crisis prompted new rules.

 

How much can I borrow now?

Unfortunately, it’s not a simple equation.

From 26 April 2014, all lenders have been required to conduct full affordability checks on mortgage applicants. This could involve an in-depth look at day-to-day outgoings, including student loans and credit card debt. 

Some over-enthusiastic lenders have questioned applicants about haircut costs, gambling habits, pocket-money commitments and even charity donations.  Lenders also “stress test” the loan—could the applicant afford to pay if interest rates rose?

 

What does that mean?

If you’re single and earn £50,000 you could expect to be able to borrow between £162,500 and £225,000. A couple with combined incomes of £75,000 could expect to be able to borrow between £225,000 and £300,000

 

Increasing your chances of getting your mortgage approved

Household budget

Lenders will require a household budget so it’s worth pulling this information together.  It may also be worth “tidying up” your monthly finances and jettisoning some unnecessary costs—such as gym membership.

 

Have supporting documents to hand

Lenders will want you to prove your income and expenditure—expect to provide three months of bank statements and pay slips.

 

Check your credit rating

Experian and Equifax allow you do this for free. But, beware, the free month-long trials are used as loss leaders—make sure you cancel your subscription once you’ve checked your score.  If you find anything untoward you can apply to have it removed.

 

Put together the largest deposit you can

Banks like you to have skin in the game and interest rates soar as you approach the maximum 95% loan to value.

 

Buy to Let (BTL) lending

Many have predicted the death of BTL in the wake of April’s 3% stamp duty levy and other punitive tax changes looming. But not all have been dissuaded.

Lending on BTL properties is not linked to income (although borrows are expected to earn at least £25,000) but rather the rental income.  Affordability is typically tested by ensuring the rental income exceeds 125% of loan interest.  But, the Bank of England has recently suggested that “stress tests” may be introduced for BTL mortgages – watch this space.  Most BTL mortgages require much larger deposits, typically 35%.

 

Should I use a mortgage broker?

Over 60% of loans are now arranged via mortgage brokers. The key advantage of using a broker is that they can pre-vet your application. 

Anyone can choose the cheapest interest rates available on the market, but that’s meaningless if you don’t qualify for the loan. A mortgage broker will be able to advise you, based on your financial situation, which lender is most likely to approve your loan.

 

Moving goalposts                                                        

The banks’ lending criteria seems to change on a weekly basis. But the fundamentals remain the same: your income, credit score, deposit and financial situation are key. 

Put your financial house in order and you’ll have a much better chance of having your mortgage application approved.