If you’re thinking about taking out a mortgage either now or in the near future, you best start to live like a monk as soon as you can. Those in-the-know are advising potential borrowers to pay off their debts and cut back on spending for a period of at least three months prior to making a mortgage application.
This could dictate that you should cut back on those “extras” that tend to show up on bank statements. So you’ll have to ditch the nights out and forego the luxuries, at least for a bit.
Childcare costs are also now a major element in assessing how much a borrower can afford.
Why this necessity to cut spending? Strict rules that have been imposed on mortgage affordability, which came into force just last year. In essence, this means that lenders will be going through bank statements with a fine eye to detail.
Basically, it comes down to what it’s always come down to – showing a potential lender that your finances are healthy and you can easily afford the repayments.
The winners will be those with tip-top financial scenarios, with clean credit records, not weighted down with a mass of monthly expenses, and with a tendency for having a fair bit left over each month which they hold onto.
Brokers state that borrowers will be able to avail of up to five time salary. The rules applies to singletons and couples. A singleton with a yearly salary of £35,000 can borrow up to £175,000, where a couple who earn, say, £50,000 can get up to £250,000.
Nevertheless, big salary earners who are particularly frugal – cycle to work, no kids, forgo costly holidays, grow their own veg – can potentially borrow up to eight times their yearly income.
However, others will not be so fortunate. Those with young kids might find they can borrow far less than they’d expected. After all, the old rules ignored expenses such as childcare costs. And childcare is a huge financial burden which can amount to £1,000s each month.
And this begs to the questions: Do couples who are weighed down by expensive childminder, nursery, and/ or after-school club fees, endeavour to cut those costs by begging friends and relatives to help with childcare?
Will those who have been planning to have kids now forgo the desire, at least for a while, until they land a mortgage?
So, under these new regulations, borrowers will need to emerge from far tougher checks which will display if they can afford to make monthly mortgage repayments.
These changes have been implemented through the “mortgage market review” or MMR implemented by the City regulator. It will mean that borrowers must answer upwards of 40 “lifestyle” questions prior to being considered for a loan.
If you head back a few years from now, the traditional “income multiple” was the key element in making a decision as to how much someone could borrow on a mortgage. That was between 3 and 3.5 times a single income, and between 2 and 2.75 times a joint income. Those figures began to creep upwards more latterly.
There is the problem that the new checks will translate to long drawn-out grillings together with intrusive questions over spending matters.
And a further problem is that the waiting times to be seen by a lending manager or mortgage advisor has risen tremendously. It’s not uncommon for waiting times to be in excess of a month. Further, the grillings/interrogations are reputed to take as long as four hours to complete.
If taking an example of a singleton who was not exactly the epitome of financial responsibility. On a yearly salary of £35,000, if they had a credit card balance of £5,000, and spent an average of £150 on holidays per month, and an average £200 per month on entertainment and recreation, where every other expense was pretty average, with a medium to high credit score, they could only borrow around £130,000.
A couple that had no kids and each earning £35,000 per year would qualify for a mortgage loan of up to £350,000, providing they were very careful with their monthly expenditures. If they had two young kids, however, given that each child cost around £500 per month for childcare, that figure would fall to a rather lowly £159,000.
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