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Before applying for a mortgage, you need to work out how much you can afford to borrow. This page explains how lenders calculate the amount they will lend you, how much deposit you will need to come up with and how much your repayments may cost.

How much should I borrow? 

When working out how much you can afford to borrow, it's important to be realistic. You may be tempted to stretch your finances to the limit in order to secure the home you want. But just because a bank or building society agrees to lend you a big sum of money, it doesn't necessarily mean you can afford to pay it back.

It's also important not to take out a mortgage that greatly exceeds the value of the property you're buying. If the value and price of your home fall, you could end up in 'negative equity', when you owe your mortgage lender more money than your home is worth.

How much can I borrow?

Anyone over the age of 18 can apply for a mortgage, though a lender will take your income and situation into account when deciding whether to give you one.

Buying on your own

If you are buying on your own, a lender will usually allow you to borrow approximately three times your annual income. This amount can be reduced if you have other regular payments to make, such as maintenance payments or credit debts.

Buying with someone else

If you are applying for a joint mortgage, you will probably be able to borrow approximately three times the higher income plus one times the lower income. The amount can be reduced if you have regular payments to make such as child maintenance payments or credit debts.

If you're self-employed

If you're self-employed or have an irregular income, you will usually need to provide the lender with accounts for the last three years. You may need to access a specialist lender through a mortgage broker. You may also have to come up with a larger deposit than someone in regular employment.

If you're on benefits

If you receive income support or pension credit, you may be able to repay the interest on a new mortgage of up to £100,000 through your benefits. This occurs if you take out, or increase, a loan to buy a new home which is better suited to the needs of a disabled person than your current home. Read the page on getting a mortgage if you're disabled or contact Ownership Options in Scotland to find out more.

Things to consider

• Allow for the fact that interest rates may increase in the future when deciding if you'll be able to afford the payments.
• Remember that your income may decrease in future - if you want to gswitch to working part-time or start a family, for example.
• Bear in mind all the other expenses involved in owning a home, such as council tax, insurance and maintenance.
• If you take out a mortgage with a low fixed rate, remember that when that fixed rate ends, your montly payments could go up substantially.
  

Use the calculators at the Council of Mortgage Lenders or Motley Fool websites to work out what you can afford to pay and how much you will be able to borrow.

How much deposit will I need?

Many banks and building societies won't lend more than between 70 and 95 per cent of the value of the property or of the purchase price, depending on which is lower. If you need to borrow 90 per cent or more, you may have to take out mortgage indemnity guarantee insurance (which could cost several hundred pounds).

If you borrow a high percentage of the property's value you will have higher charges to pay, and if property prices fall in the future, you run a greater risk of getting into negative equity (where the property is worth less than the amount you still owe to the lender).

Remember the 'value' is what the lender's valuer thinks the property is worth, and this may be less than the price you actually pay. For example, if you are bidding £105,000 for a property worth £100,000 and your lender will only lend you 90 per cent of the value (£90,000), you'll need to come up with £15,000 for the deposit.

What about other costs?

When working out how much you can put down as a deposit, don't overlook the other upfront costs of buying such as:

• solicitor's fees
• an arrangement fee to the mortgage broker or lender,
• valuation fee
• survey
• buildings insurance
• stamp duty
• moving costs
• costs for any repair or decorating work that needs done to the property.

How much will my repayments be?

Your monthly mortgage payments will depend on:

• the kind of mortgage you have taken out
• interest rates
• the length of time you have to pay your mortgage off (the mortgage term).

Interest only mortgages

If you have an interest only mortgage, the repayments you make to the lender will be lower than the payments you would make with a repayment mortgage. However, these repayments are only paying off the interest on the loan. In addition, you may be required to pay money into an ISA (an individual savings account) or other savings plan in order to pay off the capital you have borrowed when the mortgage term expires.

Repayment mortgages

If you have a repayment mortgage, you repay the sum that you have borrowed plus the interest charged.

Interest

Unless you choose a mortgage that has a fixed rate of interest (it won't go up even if interest does), your repayments will increase or decrease if the interest rate changes.

Calculating your repayments

If you know how much money you want to borrow and the interest rate your lender will charge, you can use the Which? Mortgage Guide repayment calculator to work out what your repayments might be.

Key facts

If a lender or a mortgage broker is giving you information about a mortgage that is tailored to your circumstances, that is, based on the amount of money you wish to borrow, you should be given a 'key facts' document summarising the most important features of the mortgage, including the costs. This document should be clear, easy to understand and allow you to compare costs and terms with other mortgages. You can find out more about key facts documents from the Financial Services Authority.

Other considerations

When you're thinking about how big a mortgage you want to take on and looking at how much your repayments will be, don't forget that other costs may increase when you move into your new home. For example:

• If you are moving to a bigger place, your insurance, council tax and electricity and gas bills will probably go up.
• If you are moving further away from your work, your travel expenses will probably go up.
• If you are moving from rented accommodation, you will now be responsible for paying for any repairs that need done to the property or to household appliances such as the fridge and washing machine, so you might want to keep some money back in case of emergencies.
• If you are moving to a new area, you may find the cost of living is higher there.
• If anyone in your household has a disability and you need to make adaptations to the new home to meet their needs, you may have to pay for these as well.

Remember to factor in these other housing costs when working out how much you can afford.

What if I can't afford to buy my own home?

If you cannot afford to take on a mortgage for your own home, you may be able to get a grant to help with the purchase. You may also consider shared ownership, which means that you buy part of a property (for example, a quarter or half of the value) and continue to pay rent on the rest. Alternatively, one of the Shared Equity schemes may operate in your area, and you may be eligible to get help with purchasing a home.