How to work out what your monthly mortgage payment should be

by Tim Wilson on 24 February 2010  |  3 comments
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Working out how much you can and should borrow on your mortgage is a big decision. Our top broker explains how to work out what's best for you

How much can or should I borrow?

I have been in the financial world for about 14 years now and when I get to speak to the first-time buyers the same questions come up -

1. How much can I borrow?

2. How much will it cost per month?

Time to get budgeting

The first step, as I've written before, is to sort out your budgets and work out what you have available for your mortgage payment.

This is always a good start. It's important thing to remember here that just because you are able to borrow a certain amount, it doesn't automatically mean that mortgage size is going to be affordable for you!

• Follow this guide: Draw up a budget

Income multiples and affordability tests

Ok, so exactly how much can you borrow?

This varies between each lender; some lenders will do a straight income multiple and others have their own affordability calculators. There has been an evident change in lenders' attitudes during the credit crunch, and a few of them have switched to income multiples which are dependent on your credit rating.

So for example The Woolwich will lend 3 x salary for a low credit rating and up to 5 x salary for a high credit rating.

Gambling on the credit charts

For most of us, it's a bit of a gamble on where we come up on the rating charts. What happens if I only come up as a medium credit rating? How many credit scores will it take for you to find the right lender with the right income multiple with the right credit rating? No wonder people get confused on how much they can borrow.

Let's look at an example of a couple and work out how much they can borrow from the top mortgage lenders out there.

Peter earns £25,000 per annum, with a medium credit rating, and pays a loan for his car of £50 per month

Anne earns £25,000 per annum, also with a medium credit rating, and pays £100 per month for her student loan

The first thing the lender will look at are the outgoing commitments. These will need to be calculated annually

They pay out £150 per month, so over a year that would work out as £1,800

You will now need to take this off your annual joint income, leaving them with £48,200. This is the income that most lenders will use now against the income multiple.

So what would the top lenders be happy to lend Peter and Anne?

Now it is important to note that when a lender uses an affordability calculator they will take into account dependants. So in my example, if Peter and Anne had children, then the maximum amount they can borrow would decrease, and with some the shorter the term the less you can borrow.

As you can see, there is quite a wide variance from £175,000 - £223,698 but hopefully you have worked out what your budget figure is. From that, you can work out how much you can borrow on your terms and affordability.

• Follow the tips in this guide: Cut your mortgage costs

Be clear on your credit score

It's pretty simple how they work it all out - the hard part is trying to speak to all the lenders and finding out maximum borrowing ( on your budget ). You could also apply for your credit report from Experian and find out what your credit score is - you can actually get a free trail via lovemoney.com. This will be able to give you a heads up when applying to the right lender.

It's also really important to remember not to have too many credit searches by lenders! If you have one and it passes there is no need to have any more. If you have one and it declines or doesn't give you enough borrowing potential, then get your credit report and find out why first before applying again for decisions-in-principle from any more lenders.

• Watch this video: The secret reason banks reject you for credit

Now if this has worried you or confused things even more, or you just do not have the time, then I am more than happy to help. You can email me direct on tim@lovemoney.com or speak to any of our mortgage experts on 0800 804 8045.

Also, if you have any tips, ideas or feedback for people who need guidance please feel free to share it with us via the comment box below!

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