We attach great importance to buying a home. After all, this could be the place where you spend the rest of your life, raising a family and later enjoying a well-earned retirement.
For most people, getting hold of their dream property will involve taking out a mortgage (unless you are one of the few who can buy it outright!). However, since the 2008 global financial crisis and the Financial Conduct Authority’s review of the mortgage market in 2014, it has become more difficult to take out a mortgage in the UK.
Banks now impose stricter criteria on your mortgage application, for instance, and will “stress test” your finances to ensure that you will be able to keep up your mortgage payments, in the event of trouble in the wider economy.
As a general guide, most people should be able to conceivably take out a mortgage worth up to five times their annual salary (and that of your partner/spouse, if they are also earning). So, for a single person on £25,000 a year they could plausibly take out a £125,000 mortgage. If you are married and both of you earn £50,000, on the other hand, then a £500,000 might not be unreasonable.
However, the amount you can take out is not guaranteed, as mentioned above. Banks will want to be sure you will be able to keep up your mortgage payments, for instance, if you have a baby and one of you stops working. They will want to also stress test your ability to continue making payments in the event of your redundancy, or a change/break in your career. After they have finished their assessment, you might find that they are prepared to offer you a mortgage much lower than you originally expected or hoped.
So, what can you do to increase how much you can borrow on a mortgage? Below are four steps you might want to discuss with your financial adviser. Bear in mind that this article does not constitute financial advice and is for information purposes only. Your home may be repossessed if you do not keep up repayments on your mortgage.
#1 Settle your debts
If you want your mortgage application to be looked upon favourably by lenders, then it really helps to not have large sums of credit card or other outstanding debts. Try and pay these off before you start hunting for mortgages.
Not only will this show to banks that you can be trusted to handle debts responsibly, but it should also positively impact your credit score, which can greatly affect your mortgage loan.
#2 Try to increase your income
If the size of lenders’ mortgage offers is largely tied to your earnings, then it makes sense to consider ways to grow your income in order to work towards the amount you need to get a hold of your dream home.
This might take the form of asking for a well-deserved pay rise at work. Another option might be to take up an additional job to grow your earnings. If you can bring in an extra £10,000 a year through freelance work on top of your regular job, for instance, that could make a big difference.
A special note here for those who are self-employed. It can be more difficult to get on the property ladder is this is your sole or primary source of income. The bank will probably want to see lots of evidence of your earnings over the past 3 years or so, looking at profits, losses, income, expenses, invoices and more.
#3 Watch your spending
Bank will examine your outgoings as part of the mortgage application process. So, if you are needlessly spending dozens or hundreds of pounds on things you do not use or really want, now would be a good idea to consider cutting out that waste.
Remember, lenders will “stress test” your finances to see if you can keep up mortgage payments, on top of your other regular outgoings. By freeing up some “breathing space” between your income and expenses, therefore, this can help move things in your favour.
#4 Think about outside help
In some cases, it can be appropriate to consider a Joint Borrower Sole Proprietor Mortgage (JBSPM). This allows those on a lower income (who could not afford a mortgage on their own) to enlist the help of a family member or trusted person to support their application.
Up to four people can be assessed to help the applicant pay a mortgage in this way, without becoming legally registered on the title deeds as legal owners of the property. However, bear in mind that both you and your friend(s)/family member(s) would become jointly liable for the mortgage, so it is a big risk.
If any of you cannot keep up their respective mortgage payments for whatever reason, then whoever else is responsible for payments will need to pick up the tab. You need to factor in what would happen if, all of a sudden, your family or friend suddenly stopped their payments towards the mortgage (e.g. in the event of a fall-out). What would your options be, and would you be able to keep hold of the home?
For most people, the best options to increase how much you can borrow on a mortgage will involve a combination of finding ways to grow your income, pay off unsettled debts and review your monthly spending.
In some cases, you might think about enlisting outside help from a trusted family member or friend to help pay for the mortgage, whilst allowing you to be the sole legal owner of the property. However, this decision carries a lot of risks and you should weigh this matter up carefully with a financial adviser.
It would be more ideal, for instance, if your family or friend could assist you by providing you with a lump sum to increase the size of your initial deposit, which would allow you to potentially reduce the size of your monthly mortgage payments without the risk of a JBSPM.