The real costs of a mortgage

The biggest purchase you make in your life will be when you buy a house – even though you may end up doing it several times. Whatever stage you’re at – first-time buyer, or third time mover, you will need to know how big a mortgage you can actually get before you start looking for your dream home.

In general terms, when you’re buying a home, a mortgage lender will be willing to lend you between three and four times your gross salary. This is being stretched further these days and multiples of up to nine times are not unheard of, but that is extreme. A loan of over four time salary will also mean paying higher interest rates, so it is probably undesirable. A mortgage lender will include your partner’s salary in the equation if you’re buying with that partner.

As an example, if your gross salary is £35,000 and your partners earns £27,000, then you should be able to borrow something like £167,000. An alternative is for the lender to offer to lend you three times your joint income. Using the figures from the example above, this would enable you to take a loan of £186,000. Income from bonuses and commission are usually allowed to be included as well.

Mortgage companies have in recent years, begun to take account of affordability rather than looking at multiples of salary. By looking through your bank statements and your regular outgoings a lender can decide how much it is willing to lend you. If your finances are in demonstrably good order, then it might actually result in your being able to borrow a bigger sum than using the salary multiple rules. Be aware, though, that if your finances to not appear water tight to the lender then you may not get offered as much as by the other method.

You will need a deposit to buy a house. Loan-to-value (LTV) is the phrase that a mortgage company uses to describe what percentage of the value of the property they are willing to lend you. The higher this is, the higher the mortgage they will lend you, and the less cash you will have to find for a deposit. For a first-time buyer with good finances, the LTV can be as high as 95% of the value of the property. So, if you’re looking at a house worth £120,000, you will need to find £6,000 as a deposit. If you don’t have savings to that amount, look for other ways of raising the deposit cash. For example, your parents might be willing to help.

Some lenders offer 100% mortgages, but, again, interest rates will likely be higher to cover the increased risk. A lender will want to be sure that they can their money back in case of default. The more money you can out down as a deposit and the better chance you have of getting a lower interest rate. The larger a deposit, the less risk you have of being caught in the negative equity trap; this is the situation where your mortgage is more than what your house is worth, and moving become a major problem because you will not make enough from the sale proceeds to pay off your mortgage leaving you to find the difference elsewhere.

There are other costs that go with buying a house, and the simplest of these is hiring a removal firm to shift your possessions into your new home. Other fees will be needed before you even get the keys, such as valuation, survey and legal fees (totalling over £1,500 in most cases). Then there is stamp duty, an expense that most people ignore, but nearly everyone has to find these days. For houses worth less than £125,000 there is no stamp duty. For houses worth £125,001 to £250,000 stamp duty is 1%. For houses worth £250,001 to £500,000 stamp duty is 3%, and for houses worth more than £500,000 stamp duty is 4%. What is this tax? It is a tax you pay to the government for the privilege of buying your own home. And those percentages are the amount you pay on the whole value of the property. So, for a property worth £250,000 you pay £2,500 stamp duty. For properties worth £260,000 stamp duty rockets to £7,800. So instead of paying an extra £10,000 for your home, you’re paying an extra £15,300. And with the value of houses rising as it has done in the past few years, more and more people have been caught by higher stamp duty bands, which have not moved up in the same way.

There are also mysterious things called mortgage arrangement fees. These are fees payable by you to the mortgage lender for giving you the mortgage! These can range from £499 to nearly £2000 depending on the type of mortgage you take out.

So, be wary! It’s not just the price of the house you’re looking at. There are several other thousands of pounds you will need to find to move. It’s an expensive business.