What you should consider before getting a mortgage - Gareth Shaw

Dear Gareth,

Lenders often use an ‘income multiple’ that determines the maximum loan you can get.
Lenders often use an ‘income multiple’ that determines the maximum loan you can get.

I own a property. I’m engaged and due to get married soon. My partner and I would like to buy our family home, however the plan is for my husband to purchase this as a single applicant, whilst I keep my flat, which we will rent out.

Would my partner be able to get a mortgage on his own, if I will be living with him and also being a homeowner?

Name supplied, via email.

Gareth says…

There are lots of factors that banks and building societies use to work out how much they will lend you, and whether they will lend to you at all. It will take into consideration your outgoings, your liabilities (such as debt repayments or financial dependents), but your income is a critical figure when calculating the size of the loan you can get.

Lenders often use an ‘income multiple’ that determines the maximum loan you can get. Typically, this is between three and five times your salary. The bigger the deposit you have to put down, the higher the income multiple might be.

For example, if you had a 10 per cent deposit to put down, meaning you were borrowing at 90 per cent ‘loan-to-value’, you might be able to borrow at four times your salary. If you earned £40,000 a year, that would mean a maximum loan of £160,000. But if you were putting down a 20 per cent deposit, you may be able to borrow at four-and-a-half times your salary, meaning a maximum loan of £180,000.

Some lenders offer larger amounts to people in certain professions or those with higher earnings. For example, some ‘professional’ mortgages will let borrowers with specific jobs (such as doctors, dentists etc) borrow five or five-and-a-half times their salary. Alternatively, if you have a household income of more than £80,000, you might find some banks will offer you a higher multiple.

Income can come from lots of sources. Mortgage lenders may look at gross salary, but also income from savings, rental income and annual bonuses. But crucially, they only consider the income from the applicant. So, if your fiancé is the sole applicant on the mortgage, only his income will be taken into consideration by the lender, which may limit the total amount you can borrow.

For example, if your combined income was £80,000 a year and you were putting down a 20 per cent deposit, the amount you could borrow would jump to £360,000. That would allow you to purchase a £450,000 property.

If your fiance’s income were sufficient to purchase the type of property you want to buy, there are some financial advantages – the main one being that he can benefit from a large discount on stamp duty. In England and Northern Ireland, first-time buyers pay no stamp duty on the first £300,000 of a property and five per cent and the amount between £300,000 and £500,000. That is a significant discount compared to home movers or people that have owned a property in the past, and could save your fiancé up to £5,000 on his bill.

Similar relief exists in Wales and Scotland. In Wales you pay zero per cent on the first £180,000 and 3.5 per cent on the amount between £180,000 and £250,000. In Scotland you pay zero per cent on the first £175,000 and two per cent on the amount between £175,000 and £250,000.

If you were planning to complete the purchase by 30 June, you could save even more, as there is currently a stamp duty for holiday as a result of the pandemic – which was extended from an end date of 31 March in Wednesday’s Budget. You pay nothing on the first £500,000 in England and Wales, and zero per cent on the first £250,000 if you complete after 30 June but before 30 September.

There has been a similar holiday for buyers in Wales and Scotland, offering zero per cent on the first £250,000. This is due to end on 31 March and at the time of going to press, it has not been confirmed that a similar extension has been applied in Wales and Scotland, although it looks likely.

If you were to buy together jointly, you would not benefit from the stamp duty relief for first time buyers. That’s because it is only available to people who have never owned a home – even if you sold your property, you wouldn’t get the discount. And if you marry before you buy, not only would your husband not get the first time buyer discount, you’d also have to pay an additional three per cent in stamp duty (four per cent in Scotland and Wales) as you already own a property and HMRC treats married couples as one entity for stamp duty purchases.

I would recommend an independent mortgage broker. He can assess your situation and help find the right mortgage deal for your needs, and has access to deals you don’t get on the high street. Find out more at which.co.uk/mortgagebroker.

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Thank you

James Mitchinson