Jenny asks: “With my current income and savings, will I be able to afford a mortgage and get a house in the next two years”

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Question 8 – Mortgage Affordability Questions – Shownotes

Today’s question comes from Jenny:

I’m considering buying a house, and I’ve been living at my parents’ for a while to save money. I earn just over £20k at the moment, rising soon to over £25k. After tax and deductions I currently get around £1,300 per month. So far I have managed to save £30k and I would be looking to purchase a property that costs no more than £90k.
Firstly – with my income/savings, is buying a house within the next year or so doable for me?
Secondly – I help with paying bills at home but I don’t pay a set amount or make regular monthly/weekly payments. With the affordability checks do they scrutinise your statements that much that this would affect my application?

 

Jenny – I’ll address your question in the two parts that you have asked it…

Firstly – with my income/savings, is buying a house within the next year or so doable for me?

For savings, yes. For income, it depends.

First of all, it’s worth going back to Question 2 – Should I Be Buying A House? to understand why jumping on the housing ladder when you are not ready is not a good idea.

However, if you have savings of £30k in total, I would split that down into a 3-6 month’s of expenses as an emergency fund (this will vary depending on your expenses and your job security, but let’s say £4.5k for this example), and put aside £3k for legal costs, survey costs and general moving costs (including new furniture, etc). You may not use all this, but it’s good to have that margin of safety.

That would leave you with a deposit of £22.5k which gives you a 25% deposit and hence a LTV of 75%.

On the stress test for monthly income vs expenses, they will be looking for a positive net monthly position after your mortgage payment stressed at their standard variable rate + 3% or so, which may be around 8%.

Based on a 25 year repayment, that would be £525 per month. Therefore, if all of your other monthly expenses (council tax, insurance, groceries, gym, household items, loan repayments, everything…) come to less than £775 per month, you should be okay for their affordability checks.

So often, the answer is the same with personal finance. Make a very detailed budget, starting from your expenses for the past 6 months and then makes changes you expect to come in the future to make it as accurate as possible.

Which brings us on to the second part of your question.

With the affordability checks, will the lender scrutinize your statements…?

In short, yes. Following the mortgage market review in the past few years, mortgage lenders are now legally obliged to ask for, and analyze, all of your income and expenses in certain categories. They will then verify what you have told them by cross referencing the past 3-6 months of statements.

They will also ask you to include all future expenses that you WILL incur when you live in the new home (insurance, council tax, utilities, etc).

From my experience, they simply do a sense check that these seem about right based on your age, where you are going to live, etc and will check to see if there are things you’ve omitted (for instance if you add in a car payment, but forget to add in car insurance or something similar).

As long as you are upfront with the lender and explain that you’ve lived with your parents and hence why you don’t have certain expenses on your statements, they will be happy with your expectation for future costs as long as they seem reasonable.

It will be a good idea to meet with your lender, or better still with an independent mortgage advisor, who will be able to give specifics regarding different lenders, as different mortgage providers will look at things slightly differently. For instance, if your upcoming wage increase is contractual, then some may take that into account when they are working out your income vs expenses and the corresponding stress tests.

To conclude, well done. You’ve built up a good healthy deposit whilst living with your parents, and are looking for a home in a reasonable house price range so that you won’t be overstretching yourself. Now, make your current budget (all your current income and expenses) and a “future” budget, which will include all of your expenses that you will incur in your new home. Test it yourself with interest rates at 8%, and if you come out with a positive monthly net figure, then the mortgage lender will probably reach the same conclusion.

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