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Mortgage Calculators for maximum loans are a waste of time

The next part of my why you should use a mortgage broker theme of the week is the humble affordability calculator.

We do a little pay per click advertising on the various search engines, this is no secret. But it surprised me to see so many hits coming through the somewhat spurious term “mortgage calculator” and it occurred to me that rather than this being people searching to find out what their monthly payment would be (as pretty much everyone has one of these calculators) it is probably people looking to see how much they can borrow.

If this is the case and you are reading this article because you were looking to find that out let me explain something, calculators that purport to tell you what the maximum you can borrow is are a waste of your time. Plain and simple.

The reason is this, every lender will take a multiple of your income and your partners if applicable or a percentage of your gross or net income and the sum will be different with ever lender. They may then deduct your loans and other credit commitments (but the way they do this will also be different with every lender). They may deduct a figure for each dependent child you have, and they may use their standard variable as a basis for affordability or the product rate you will be borrowing if they use a rate to calculate it at all.

Clearly a calculator cannot be set up to work out the maximum based on all the different methods of assessment used, so they use a “best case” method to give you a rough idea. This might seem useful but if the best case happens to be a bit optimistic it could cause you some big headaches and if it is woefully underestimated then you might miss your dream home based on poor information. The only calculators that are reliable are those on lenders websites, but they only work for that lender and will often be based around your credit score anyway which you cannot predict.

Affordability assessment is very complex and is an ever changing landscape, so if you want to know what the maximum you can borrow is speak to a mortgage advisor as that’s what we’re here for.

Mortgage Advice VS Comparison Sites

There’s some big shifts in the market at the moment which are affecting all mortgage advisors quite a bit, and one of the biggest trends is the growing movement towards self execution facilitated by comparison websites.

Now I am a fan of the internet and I even support the comparison websites as they do have a valid role to play. But Financial Advice and Mortgage Advice are not defunct because of them and I want to give you some points to consider in my posts this week.

I had a scenario recently of someone looking to buy a second property as an investment and repay a mortgage over a very short term perhaps 10 years. The client was self employed and wanted a product without any tie in.

Now in this scenario he would have very high monthly payments, and it is a tricky market for affordability at the moment. The best rate product for his requirements also had an offset facility so I suggested he could increase the term of the mortgage reducing the payments he had to make and make the loan look more affordable. However as it was offset he could pay as much as he liked extra and this would then reduce the mortgage term back in line with his requirements.

This meant that he wouldn’t have to make the high payments but could do so if he wished, and for a businessman in the credit crunch that is a very useful option to have.

I think this is a prime example of how mortgage advice plays a very different role to a comparison site. In this case it wasn’t about getting a lower cost, but using a products features to improve his chances of getting the loan, and to reduce the financial risk to him and his business without increasing the cost. That’s why a Mortgage Broker is well worth speaking to regardless of how much experience you have of mortgages.

Site Relaunch

Just a quick post today to say our website has recenly been re-launched including lots of new content, online quote forms, mortgage calcultors and much more.

Theres lots of new information about other areas of our business including Commercial Insurance, Key Persons’ Insurance, Shareholder & Partnership Protection plans, our conveyancing partners, Life Insurance, Critical Illness cover, Permanent Health Insurance, Home Insurance and much more so if you haven’t stopped by recently drop in and take a fresh look.

More on buying without deposit

I wrote a couple of weeks ago about the amount of enquiries mortgage brokers are facing around buying without deposit and I forgot to mention a couple of other important ways to buy without deposit in my previous post.

Firstly it is possible to arrange a gifted deposit from relatives or even possibly another interested party using a form of contract which entitles them to ownership of the relevant share of the property. This contract would allow you to buy the interested party out at your choice or entitle them to the share on sale.

This device gives the potential giftor a legal right to some of the proceeds of sale even if values continue to fall and much more certainty of receiving their gift back in the future.

Also those who are lucky enough to have the right to buy a council property may be able to buy without deposit as well because many lenders will accept the discounted value of the property as the deposit as long as their valuation reflects the councils figures.

However if you are  eligible for a Right to Buy but live in a council flat don’t get too excited straight away as many lenders are restricting their exposure on flats due to the flood of 1 bed properties during the boom so if your property isn’t a house its a good idea to speak to a mortgage advisor and see whether a deposit will or will not be required.

Things aren’t always as bad as they seem

The Halifax have just announced a small drop in their house price index for June of 0.5% which on the face of it would suggest that the worst may not yet be over for property values despite promising rises in similar index’s over the past few months.

However there is a general feeling among the industry now that the bottom is out, and while prices are likely to remain fairly stable for at least the next year due to lack of mortgage products there is some good news out there for people looking to borrow.

Recent research from suggests that many people now believe that they can only get between 0.5 and 2.5 times their income when looking to mortgage and that only 24% of the UK believes they could arrange a mortgage for more than 4 times their main income.

The truth is that most lenders will accept four times main income as a guide or perhaps 3.5 times joint income however the difficulty is really for those with dependent children which has started to play a more significant role in lenders assessment of affordability and those people who have existing credit commitments which will continue to run after the mortgage completes.

If you are holding significant savings and have existing loans which have a short term to run it may be worth considering paying off loans before applying for a mortgage in order to assist your maximum loan and affordability calculation particularly if you also have children.

If you are unsure how much a mortgage lender will consider lending you many now have useful calculators which will give you an indicator of their maximum loan available on their websites.

Hedging your bets? Switch and Fix.

I wrote recently about the tough decision some people are having to take about whether to fix their mortgage now or wait on their standard variable rate rises and with today’s announcement that base rate will stay unchanged at 0.5% the decision hasn’t got any easier.

There is however a nifty product currently being offered by Nationwide Building Society (one of the few lenders still touting for new business) which allows you to take one of their current tracker products now and switch it to a fixed rate whenever you choose without incurring early repayment charges.

Other providers have similar offerings however there is a difference which sets them apart. The Nationwide will allow you to switch to a fixed rate based on the Loan to Value of the valuation taken when you arrange your tracker, which means that if value’s continue to fall you will not be locked out of new deals.

You will have to pay a second arrangement fee however and you will be restricted to the fixed rates available when you decide to change which could be higher than those available now but if you aren’t sure which way to turn at least this offers a get out clause which normal tracker products will not.

Who needs Self Certification?

There have been muted announcement’s from the FSA recently that indicate they may be moving to stop fast track lending and self certification mortgages for people in full time employment but there still seems to be a lack of understanding in what self cert is for.

Self Certification is designed for those who cannot prove their income and for whom normal lending practice of considering income that is not guaranteed at a rate of 50% would cause unfair difficulty in borrowing.
There are many types of employment that are paid largely in commission income ranging from recruitment consultants, estate agents, business development managers to stock brokers, (even mortgage advisors my friend!). These are all forms of employment that may produce a need for self certification.

Other people that are owners of a business that may produce very irregular income streams such as businesses in tourism sectors or a firm that was paid on completion of large irregular contracts may also have a need to self certify particularly when self employed.

What it is not is a means to inflate income. Lenders will withhold the right to contact employers, ask for bank statements and other supporting information so if the figures are out of the ordinary they should be asking questions and hopefully if the FSA keep this mind it won’t be banned. There is a home for Self Certification that shouldn’t be ignored.

Can I Buy without a deposit?

A big question for many first time buyers at the moment is how can I purchase a house without a deposit in the absence of 100% mortgage products.

One way that is possible is the governments Home Buy Direct shared equity scheme which allows customers to buy a house for 70% or more of its value, the developer or makes a loan for the remainder on an interest free basis which later reverts to a very low rate such as 1.75% after several years. Some of the property developers involved in the scheme are offering purchase without deposit.

The scheme operator is repaid either by staircasing (buying a larger stake in the property towards 100% ownership) or on sale of the property in which case they will take their percentage of the sale value.

Housing associations may also run similar schemes known as shared ownership where you purchase between 25-75% of a property typically and pay a nominal rent on the remainder however these may require a deposit. Broadly both schemes are quite similar.

To find out more search for Home buy Direct on Google etc or for housing associations in your area.

However one way that usually wouldn’t work is if the vendor simply strikes the deposit value off the sale price. Known as a vendors deposit this is now very unlikely to be accepted and pretty much all lenders will take the lesser figure for the valuation leaving you back at square one.

Getting the right advice

As a mortgage advisor you often have to try and combat the expert opinion of “the bloke down the pub” and even apparently knowledgeable sources.

Whilst looking for a table of current standard variable rates recently I came across this quote on;

“First of all, let’s look at Standard Variable Rate (SVR). This is the standard rate of interest that lenders use and like it says, it is variable. This is because it is linked to the Bank of England base rate – so whenever that goes up, so will your mortgage rate and thus so will your mortgage payments.

However, SVR Mortgages aren’t just linked to the base rate, they’re usually set at around 1-2% higher. This makes this type of mortgage very expensive.”

Any mortgage broker worth his salt would cringe at the apparent advice that SVR’s are linked to the bank base rate and will move in line with them. Any borrower whose SVR is still standing above 3% is probably more than aware that this is not the case.

Actually the lenders SVR is a rate that could move in relation to many things including the LIBOR rate, bank base rate and just as importantly the need to attract savers in order to lend money in the first place which is one of the key reasons why the full extent of the cuts in bank base rate has not been passed on by many banks as well as their obvious need to re-capitalise.

What’s the point you ask? When you’re looking to find out what to do with your mortgage speak to a qualified and authorised mortgage broker whose advice is properly scrutinised for accuracy

Time to fix your mortgage?

A lot of people have been asking me recently whether it’s the right time to fix their mortgage payment in light of the fact that rates have started to go up.

And it’s a very interesting question without a very straightforward answer, but here’s the main considerations to think about.

Firstly if you are on or about to go onto your banks standard variable rate, is it below the current fixed rates? Many banks haven’t passed on the full rate cut and there are SVR’s out there far higher than current fixes if you have a decent amount of equity in your property. There are fixed rates available around the 3% mark if you have 25-30% equity.

So if your current rate is above 3% then it’s well worth considering if you have the equity there however if you don’t have a lot of equity or if you have any significant adverse credit the picture changes considerably and it may be better waiting till rates are about to jump significantly, it largely depends on how much more a month you will have to pay in order to fix now.

If you have a very low standard variable rate then the really big question is when will bank base rate go up and by how much? And while Mervin King announced that it definitely wouldn’t go up this year, it’s well worth looking at inflation. You may have noticed petrol starting to go up again and crude oil prices have bounced back to $70 a barrel. This could have a big effect on the Retail Prices Index & Consumer Prices Index and very importantly swap rates, and if you look at prices of other commodities which eventually filter down to consumer prices such as prices for metals like steel and aluminium many are enjoying a boost at the moment as well.

Many lenders have just increased their fixed rates due to increases in swap rates. Unfortunately without a crystal ball it’s hard to know whether swap rates will continue to rise or if they may even fall again before the bank base rate changes. It is likely though that the swap rate increases are due to inflation concern and the anticipated rise in base rate so may continue to rise moving forward. Historically speaking a 3-4% interest rate on a mortgage is still low so this all points to now being a good time to fix for 2-3 years as long as your circumstances suit.


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