How much can I borrow?
If you're thinking about buying your own place, here are some of the financial issues that you need to know about.
The average house price for a first time buyer in the UK is £147,746 (February 2009). This means that the majority of buyers will need to borrow cash from banks and mortgage companies in order to get a foot on the property ladder.
Maximum mortgage
If you are a single person or the only wage earner, the amount that you can borrow will normally be three times your gross salary, which is before tax and other deductions, however some will lend up to four times your gross salary.
For example: if your salary = £24,000 per year your maximum borrowing will be 3 x 24,000 = £72,000.
If you are buying with a partner or friend, the amount you can jointly borrow can be worked out as 2.5 times your combined salaries before tax. It may also be worked out as 3 times the higher salary before tax, plus 1 times the lower salary before tax:
For example: with a higher salary of £18,000 and a lower salary of £10,000, your maximum borrowing will be:
2.5 x (24,000 + 18,000) = £105,000
OR 3 x 24,000 (72,000) + 1 x 18,000 = £90,000
(whichever is higher).
If you are self-employed the amount you can borrow is based on your business accounts and will probably be calculated using your net income.
You can calculate how much you could borrow using the Guardian's mortgage calculator.
The deposit
Most lenders ask for a deposit of between 5% and 10% and you would then borrow the remainder. Some mortgage lenders have previously offered 100% of the purchase price or valuation (whichever is lower), although these are uncommon now. However, first time buyers can typically only borrow up to 95%.
When you reach the exchange of contract stage, you'll also be asked to pay a lump-sum deposit to show your commitment to buying. This is usually a minimum of 5% of the purchase price.
The 'High Loan to Value' Fee
This fee is charged if you wish to borrow 90% or more of the property's valuation or purchase price, whichever is lower. Sometimes called LTV or MIG (mortgage indemnity guarantee).
The fee is charged because there is a greater risk to the mortgage lender when the total amount to be borrowed is more than 75% Loan to Value. It is payable in a lump sum and will normally be added onto your loan. The fee is not refundable if, for example, the mortgage is redeemed early.
There are also lots of hidden costs to take into account if you're thinking of buying your own home.
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