How much can I AFFORD?

Why window shop for properties only to find that your dream home is well out of your price bracket? By figuring out your finances before you start your search you won't set your sights on a mansion when you can only afford a maisonnette

The first step to a happy house purchase is to calculate how much you will be able to borrow from mortgage lenders. Mortgages used to be calculated on income multiples, but lenders now consider other factors. As a general rule, the estimated mortgage you can hope to achieve is usually four times your income, or three times for a joint application, but expect mortgage offers to vary considerably. Melanie Bien, director of independent mortgage broker Savills Private Finance, explains that the modern day process is complicated: "Lenders increasingly use affordability criteria to calculate how much you can borrow, moving away from the old-fashioned method of strict income multiples. This means they take into account your outgoings and debts as well as your income."

Vivian Slattery, director of Monetary Solutions, advises that the criteria varies considerably between lenders. "Some offer as much as £20,000 more than others for the same scenario, depending on how they each calculate the maximum they're willing to lend. Some lenders base their offer on the size of the deposit you can put down, while others depend on your wage bracket. Some base their calculations on affordability and others on income multiples. Different lenders even have different approaches to overtime pay, some using the latest year's P60 earnings, and others only taking 50% of overtime into account."

A major factor that affects the amount you can spend on property is how much capital you have to invest. In the current climate, you will need a large deposit and a budget for all the extras that go with buying a property. Lenders have withdrawn many products that allow you to put down a small deposit, and the 100% mortgages on offer a year ago are a distant memory.

Bien says: "Lenders are reluctant to offer mortgages to those with little or no deposit because with falling house prices you are at risk of negative equity. Most require at least a 10% deposit. But the bigger the deposit you can generate, the better; lenders offer lower interest rates to those with a 25% or even 40% deposit."

Many first time buyers do not have such large amounts of disposable capital, and have had to opt out of the property hunt. However, Bien explains that lenders will have to look at offering more competitive mortgage products with higher loan to value (LTV) in the near future. "Lenders will increase LTVs as this will be the only way to kick-start the housing market. However, this is unlikely to happen overnight. We expect to see some softening on maximum LTVs in the second half of the year but much depends on the latest bank bailout and whether it makes more money available for lending."

A common mistake when working out the affordability of a property is to forget the extras that come with buying a home. Bien explains that the buying process can be costly: "If you are paying more than £175,000 you will have to pay Stamp Duty, for example, at 1% of the purchase price on properties between £175,000 and £250,000. There will also be legal fees for conveyancing and you will need a survey, which can cost several hundred pounds depending on which one you go for. You will also need to pay the lender's arrangement fee, which could be another £1,000, plus a mortgage broker fee. As it's your first home, you may also need to buy furniture so the cost of the property is just one of the factors you need to consider."

Once the amount that you can obtain from a mortgage and your monthly payments have been calculated, it is advisable to calculate a monthly budget which includes your mortgage payments, outgoings and bills. This will help you make sure that you haven't financially overextended yourself. Missed payments are not taken lightly and your new home could become a repossession casualty if you do not keep up your payments. If you are looking at a variable mortgage, be aware that your monthly payments can rise considerably with interest rates rises.

The best advice when you are embarking on the long, complicated journey of buying your own home is to approach an independent mortgage broker or financial adviser right from the start. "They should have the knowledge, experience and a sourcing system to quickly identify the most suitable lender for you and together you can work out how much you can afford," explains Slattery. "They can help you run through all the costs and ensure you haven't forgotten any of them," agrees Bien.

Getting a mortgage offer prior to starting the house hunt is a good idea, Bien continues. "Mortgage brokers will be able to get you a 'decision in principle' from a lender before you start property hunting - this ensures you have a ballpark figure of what you can borrow so you don't waste your time looking at much more expensive property. Vendors are also keen to see that you have considered finance and taken the first steps to secure it." It's worth bearing in mind however that each mortgage application affects your credit rating, so the fewer you apply for, the fewer knocks your credit score will take.

If it seems that you cannot afford any of the properties advertised in your local estate agents' windows, there are other options available. The Government offers a number of products for people who cannot afford to buy on the open market. HomeBuy schemes offer various incentives which address problems such as affordability and lack of deposit.

For more information and advice on mortgages, contact Savills Private Finance on 020 7330 8534 or Monetary Solutions (www.monetarysolutions.co.uk) on 020 8760 9940.

Contact your local HomeBuy agent for further information on Government schemes. Details can be found in the directory.

QUICK GUIDE
Income multiples
Many mortgage providers multiply your income by four times (or three times for joint applications) to calculate the amount of loan you can get, although other factors such as loans, expenditure and your credit score do come into their estimates.

Deposit
After subtracting all the fees for your potential purchase, work out how much in savings you have left for a deposit. Currently, you will need around 25% of the house's purchase price to qualify for the best mortgage deals. The biggest stumbling block to achieving a decent mortgage is having enough deposit.

Property prices
It is possible to negotiate on advertised property prices. In some cases desperate vendors or developers may reduce their asking price by as much as 25% for a quick sale. Make sure you don't forget to look at properties advertised slightly above your price bracket, and be prepared to bargain hard.

Get advice
Visit a mortgage advisor for a free initial consultation as they will be able to give you a rough estimate of the price bracket you should be looking at. It is not advisable to apply for mortgages at this point, because applications can affect your credit score and mortgage offers or a 'decision in principle' have a short life span - usually three months.

Government funding options
If your options are limited, then contact your local HomeBuy Agent and enquire about the Government's help. HomeBuy schemes aim to get first time buyers in to the property market by offering low equity loans which can be used as a deposit or by giving the buyer the opportunity to buy a share of a property.

DEPOSITS PUT A HALT ON BORROWING

Case study:

Harry has an income of £40,000
He has saved a deposit of £20,000

His estimated mortgage amount is £40,000 X 4 = £160,000

In theory therefore, Harry should be able to afford a property worth £180,000

However, because Harry's deposit only equates to 11% of the property's value (of £180,000), the mortgage products available to him are limited and accompanied with costly fees and interest payments. If he wants to avoid the sting and still obtain a decent mortgage package, he should only look at properties valued at around £100,000. This will enable him to pay the more standard 20% deposit that many mortgage providers request.