# The Mortgage Bank Mortgage Calculator

## Calculate your Mortgage borrowing

The Mortgage Bank Mortgage calculator is an estimate based on the information you have provided.  A full mortgage quote can be provided by one of our hand-picked mortgage brokers who will also help with a full affordability assessment.

# Mortgage Calculator

## The Mortgage Bank Mortgage Calculator Explained

A mortgage calculator is a very useful means of testing different scenarios to calculate levels of monthly mortgage repayments. Comparing and contrasting different loan amounts, deposits, mortgage terms, and annual interest rates can help you calculate where you need to be to comfortably afford that dream home.

The best way to demonstrate our mortgage calculator is to give you an example as follows:-

• Property value: £200,000
• Mortgage type: Repayment
 Deposit Mortgage Mortgage Term Annual Interest Rate Monthly Repayments Total Repayments £40,000 £160,000 25 years 4% £845 £253,362 £40,000 £160,000 25 years 3% £759 £227,621 £40,000 £160,000 20 years 3% £887 £212,965 £60,000 £140,000 25 years 4% £739 £221,691

As you will see in the above table, we have made some subtle adjustments to the mortgage amount, mortgage term and interest rate. When calculating the best mortgage deal for your situation, you need to take into account the level of monthly payments you can “comfortably” afford.

The reason we mention the word “comfortably” is because, with the best will in the world, we will all encounter unexpected costs going forward, which may impact our short-term cash flow. If there is a significant buffer between your monthly mortgage repayments and your monthly surplus capital then an unexpected cost, although obviously not ideal, would not necessarily leave you short of funds to cover mortgage repayments.

If you were leveraged up to the max and went for the shortest mortgage term possible, this may leave little in the way of manoeuvrability when facing unexpected costs. It is also worth noting that many mortgage companies will offer you the opportunity to make ad hoc payments against your mortgage capital without additional charges.

Therefore, it may be sensible to err on the side of caution when looking at the mortgage term. In the event that your finances strengthen, or perhaps you come into additional capital, you will have the option to make additional payments towards your mortgage.

We also need to take an array of other factors into accounts such as LTV ratios, credit references, household budgets and the ultimate, which is the mortgage affordability test.

## Getting Prepared for a Mortgage Application

To paraphrase a term by the famous Robert Burns, “the best-laid plans of mice and men often go awry”. However, when looking at a mortgage application, it is not only useful to plan ahead but extremely important.

You should consider issues such as:-

#### What Can You Reasonably Afford?

In a perfect world, we would all seek to acquire that dream home, the perfect neighbourhood and a property which has potential for long-term capital growth. In reality, when starting out on the housing ladder, you may need to rein in your long-term hopes and aspirations.

Have a think about the type of property you could afford, the level of funding you would require while still keeping one eye on your long-term hopes. We will cover this issue in more detail later on, but you also need to keep an eye on interest rates.

For example, UK base rates currently stand at 0.1% with standard mortgage rates anywhere between 3% and 4% – although these can be improved using fixed-rate promotions. What happens as and when UK base rates return to their previous “norm” of say 4%.

It would not be difficult to see UK mortgage rates increase to around 7% or even higher if you had a chequered financial history. Would you still be able to cover the monthly payments? Have you left yourself enough of a buffer between your living expenses, income and regular mortgage payments?

These are all factors to consider in great detail before you even think about raising mortgage finance.

#### Credit Score

If you are looking towards the higher echelons of the 4.5 times household income, then you will need to have an almost perfect credit score. The Internet has made credit reports more available to everybody, and you can actually keep track of your credit score.

There are numerous ways in which you can improve your credit score such as applying for additional credit although not necessarily using it, additional savings accounts and basically ensuring that you keep up-to-date with all of your repayments.

One of the main issues to remember with a credit score is the fact that the credit history upon which this is based goes back six years. So, looking back over the last six years, the credit rating agencies will consider all events to arrive at your credit score. It matters little if you have relatively high-income today if over the last six years, for example, you were involved in an IVA, bankruptcy or other debt management plan.

The fact remains that you will likely have missed an array of repayments on pre-agreed finance and this does not reflect well with mortgage lenders. That is not to say they would reject an application, but you may well see a reduction in the potential income multiple.

#### Household Budgets

It sounds relatively straightforward and obvious, but if you can adjust your household budget, so you have a little more surplus capital, then this could assist with a mortgage application. While the mortgage application itself is based on the fundamental risk/reward ratio, the larger the buffer between your living expenses and your income then, in theory, the more you can repay each month towards a mortgage.

While considering your household budget, expenses and income, you also need to be sensible and not look to overstretch yourself. Bizarrely, some mortgage lenders would prefer you to be a little more conservative and perhaps stretch your mortgage term over a longer period rather than looking to repay it as quickly as possible within a tight financial budget.

Whether we like it or not, we will all face unexpected costs in the weeks, months and years ahead, which can make a difference. If your finances are relatively tight, then something as simple as a broken washing machine or problems with your car could leave you with significantly reduced cash flow.

#### Raising a Deposit

We will look at deposits and LTV ratios in more detail further on in this article, but before you even make a mortgage application, it makes sense to consider what level of deposit you could raise. Under normal circumstances, the majority of mortgage lenders would require a minimum 20% deposit, although this level would reflect your financial status and could be significantly higher.

So, before you rush to make a mortgage application, you need to consider how much you would be willing/able to put down as a deposit against the property.

The situation is a little different for first-time buyers with the UK government offering financial assistance with a deposit of as little as 5% required by some first-time buyers. These various schemes could see basic financial assistance or the UK government taking a stake in households.

Financial assistance for first-time buyers tends to change dramatically depending upon the government and the economy at the time.

## Applying for a Mortgage

The application process for a mortgage is relatively simple; you create a report which highlights your income, expenses and potential surplus capital each month. Working backwards, you can see that a particular level of income could support a particular level of mortgage.

You would then need to compare and contrast different mortgage terms and LTV ratios.

#### Research the Marketplace

As we touched on above, mortgage rates at the time will be a reflection of not only the economy but also interest rates and the liquidity/competition amongst mortgage lenders. The Internet has opened up the mortgage market to the masses; you can now research different types of mortgages, different rates and also look towards mortgage brokers to get the best deals.

Even though you may end up going through a mortgage broker, there is nothing wrong in researching the mechanics of the mortgage market so that you know what to expect and your financial liabilities. While mortgage calculators are very useful in giving you basic information, they do not take into account your credit rating and living expenses, which can obviously vary widely from applicant to applicant.

#### Maximising Your Income

Income is obviously central to any mortgage application as this is the means by which you make repayments/raise funds. In line with the above comments regarding planning ahead, it may be that over the next two years you expect a significant increase in your salary.

So, if you are perhaps looking at buying a property next month, would it not make sense to hold off a little bit? As we touched on above, if we use the maximum income multiple of 4.5 times, if you saw your salary go from £20,000 up to £30,000, this is a potential difference in mortgage funding of £45,000.

There is an argument to suggest that a potential mortgage lender should take into account your future income, but why? The reality is, like mortgage interest rates, the only income you can be sure of today is the salary you are receiving, today. Private banks and niche mortgage lenders are slightly different as some will take into account your potential for the future when calculating mortgage funding.

However, this is a whole different area of the mortgage market and one we will cover in more detail shortly.

#### Mortgage Affordability Calculation

In light of the 2008/9 mortgage crisis, which ultimately led to a recession, the likes of which have not been seen since the depression, mortgage regulations were tightened. The UK regulator, the FCA, stepped forward with new regulations aimed at reducing the likelihood of such a huge mortgage induced downturn in the future.

Traditional mortgage lenders often referred to as high-street banks, were ordered to work on a maximum 4.5 times income when calculating mortgage funding opportunities. As this is the higher end of the spectrum, it is unlikely that the majority of applicants will achieve such a multiple, but it also puts a ceiling on potential mortgage bad debts going forward.

In reality, it was also a shot across the bow for speculators, many of whom had previously used high levels of leverage to fund short-term speculative acquisitions.

The mortgage affordability test will not only take into account your overall financial status and ability to cover mortgage payments on current rates, but it will also stress test different rates. In the current market, with UK base rates at 0.1%, it is difficult to see any further meaningful downside for mortgage rates.

While for many the higher rates used in the stress test may never be reached, who’d have thought more than a decade after the initial US mortgage crisis that base rates would still be at their historic low? It just shows that it is very difficult, if not impossible, to make any future forecasts with any great confidence.

## Sources of Mortgage Finance

Before we take a look at the different types of mortgage available, it is probably useful to take a wider look at the mortgage market which incorporates traditional lenders, private banks and niche mortgage lenders.

They all operate under very different regulations, thereby opening up a variety of different opportunities for those looking to acquire a home.

#### Traditional Mortgage Lenders

When we say traditional mortgage lenders, we are talking about high-street banks who until recently dominated the UK mortgage industry. At a time when private banks and niche lenders were often “invitation only” for the vast majority of those looking for a mortgage, high-street banks were the first and only port of call for many.

It is fair to say that during the aftermath of the 2008/9 mortgage crisis, we saw many traditional banks in the UK taking a step back. Regulations were tightened, their balance sheets had been hit, and many were concerned about taking on additional mortgage lending in what were troubled economic times.

We also saw a significant reduction in LTV ratios which increased the required deposit for property acquisitions and therefore priced many people out of the marketplace.

It would be unfair to suggest that traditional mortgage lenders in the UK are uncompetitive, but they are competitive in areas of their choice. For example, while private banks and niche lenders will accommodate so-called “vanilla” mortgages, they tend to specialise in different areas. So, it is possible that a traditional mortgage lender in the UK could still be competitive for very simple uncomplicated mortgages.

What we do know is that the overall market share of traditional mortgage lenders in the UK has reduced significantly in recent years. Private banks have stepped in from the shadows, niche lenders are extremely competitive in their specialist areas, and we have even seen the emergence of crowdfunding platforms.

There is competition, but at the end of the day, competition is good for not only for the industry but especially for borrowers.

#### Private Banks

Private banks are probably most associated with ultrahigh net worth and high net worth individuals. The mortgage divisions of private banks tend to be used as a means of attracting new business from wealthy individuals looking to raise mortgage finance.

The idea is simple: for more specialist funding requirements, such as for example, foreign investors looking to acquire UK property, private banks can often offer extremely competitive rates. Some mortgage arrangements may also require investments to be transferred to a private banks asset management division to secure preferential terms.

Often seen as risk-takers, this is basically untrue, private banks will only lend to those who can afford the repayments whether via traditional income measurements or perhaps using assets and other collateral available. They are more flexible, of that there is no doubt, with private banks tending to see the overall picture and potential going forward.

A competitively priced mortgage might be seen as the first stepping stone to a broader and more lucrative long-term relationship with each borrower.

#### Niche Mortgage Lenders

There are so many different niche areas of the mortgage market that it is not difficult to see why this area of the industry continues to grow. From buy to let properties to holiday homes, land acquisitions to property development, there are many different specialist areas of mortgage funding.

The beauty of a niche mortgage lender is the fact that they will focus on a particular element of the market as opposed to taking a broad-brush approach. This means that they can offer ultra-competitive rates, up-to-date market information and advice, which in itself can be invaluable.

We touched on crowdfunding platforms earlier which many would also class as a niche mortgage lender. In effect, these funding platforms bring together lenders and borrowers with the platform taking a relatively small fee for each transaction agreed.

There are even some crowdfunding platforms which will fund mortgage agreements themselves, able to offer competitive rates by stripping out various layers of cost. While niche mortgage lenders may not be a viable option for everybody, they do certainly have a place in the market.

## Changing LTV Ratios

The thing about deposits and LTV ratios is that we tend to be very short-sighted and assume that what we see before us today is also the market of the future. At the moment a traditional mortgage would require a minimum 20% deposit (unless the applicant was an assisted first-time buyer) which means a maximum LTV ratio of 80%.

In reality, the majority of homebuyers might require a higher deposit which would equate to a lower LTV ratio. The loan to value ratio (LTV) is an indicator of the buffer between mortgage debts and the value of the property.

For example, a property worth £100,000 with an 80% LTV ratio mortgage equates to an £80,000 mortgage and a 20% deposit. If the value of the property were to fall by 10%, however unlikely, the scenario would change, the debt would still be £80,000, but the value of the property will have fallen to £90,000. So, the initial 20% buffer is now reduced to an 11% buffer before the property slips into negative equity.

Even though the long-term trend in property values in the UK is most certainly upward, there have been periods of difficulty, and many people have unfortunately experienced negative equity.

If we backtrack to the 1980s and 1990s, which was seen as a boom time for the UK property market, it was possible to obtain 100% LTV mortgages. This effectively meant that assuming you could afford the repayments, you were able to borrow 100% of the value of a property. Bizarrely, some companies such as Northern Rock actually offered 110% mortgages.

If there was a downturn in the UK property market, which there was, it is not difficult to see the dangers of slipping into negative equity. Incidentally, this high-risk approach was taken by Northern Rock eventually led to the demise of the group which was bailed out, then eventually closed down, by the UK government to protect the integrity of the mortgage market.

## Mortgage Term

When looking at a mortgage term, many people are naturally drawn to apply for a relatively short-term mortgage when this may not be the right course of action. The idea is simple, scrimp and save to pay off your mortgage as quickly as possible at which point your home is debt-free. In a perfect world, we would all prefer to take this approach!

Unfortunately, as we alluded to above, nobody can see into the future and therefore, a cautious approach is recommended when seeking mortgage finance. Remember, the vast majority of mortgages today will allow you to make ad hoc repayments to bring down the level of debt.

So, if you plan on a more conservative basis with a longer mortgage term, this will protect you from unforeseen expenses going forward. Over the years you may see an increase in your salary, you may change career, and you may be able to afford additional repayments. On the flip side of the coin, if you give yourself enough of a buffer between your income, living expenses, mortgage repayments and mortgage debt, this may give you some room to manoeuvre if, for example, you experience a temporary reduction in your income. It works both ways…..

## Types of Mortgage

If we look at traditional retail mortgages, there are numerous options with some a better fit than others for individual circumstances.

#### Interest-Only Mortgages

While not as common today, interest-only mortgages allow you to repay the mortgage capital at the end of the term while covering interest payments on a monthly basis. The idea is simple; this reduces the applicant’s cash flow requirements while the mortgage capital is protected by the value of the property.

Whether the homeowner will remortgage or be in a position to pay off the mortgage capital at the end of the term, possibly by downsizing or releasing equity, is a whole different topic.

#### Repayment Mortgages

Repayment mortgages are the standard type available today with elements of capital and interest repaid each month. This means that not only are you covering interest payments on the initial mortgage loan, but you are also chipping away at the mortgage capital month by month as the capital reduces so the interest rate element follows.

While this type of mortgage requires a higher monthly payment, compared to interest-only mortgages, at the end of the mortgage, is not only the interest paid off but also the initial capital.

#### Flexible Mortgages

There is an array of flexible mortgages available today which will allow you to vary your mortgage payments within an agreed band. There are also mortgages which will allow early repayment without any penalties and what is known as offset mortgages.

Offset mortgages are an interesting phenomenon; they require your mortgage account and your current/savings accounts to be connected. Any income that you receive can be paid into an offset account which effectively reduces the daily level of your mortgage.

Through the month as and when you require funds these will be taken from the offset account until next payday. However, during the period when surplus funds were held in the offset account, this would reduce the outstanding mortgage capital and therefore interest payments.

## Mortgage Brokers

The Internet has opened up the UK mortgage market to borrowers with an array of information and even online applications available. However, the mortgage market has become more complicated, and it may not be easy to identify the best mortgage for your situation.

Indeed, with over 300 lenders in the UK money market, it is impossible to check all of the offers on a constant basis. As a consequence, many of those looking to acquire property are now employing the services of mortgage brokers.

There are two types of mortgage brokers, independent mortgage brokers and tied mortgage brokers. They offer the same service, but it is their access to different lenders which makes them slightly different.

#### Independent Mortgage Brokers

As the term suggests, independent mortgage brokers have no formal ties with anyone or group of lenders. They are free to scour the market to find the best deal for your circumstances and your proposed property acquisition.

In reality, their tentacles will stretch further than a tied mortgage broker, but they will tend to have stronger relations with some lenders than others. One benefit which is often overlooked is the fact that they will also have access to new entrants to the market, which is not always the case for tied mortgage brokers.

#### Tied Mortgage Brokers

There is a general conception that tied mortgage brokers “must” always be less competitive than their independent counterparts because they have access to fewer lenders. In theory, we can understand where this opinion comes from, but in practice, it can be very different.

What you tend to find is that a tied mortgage broker will work closely with one small group of lenders, often channelling significant mortgage funding requests their way. As a consequence of the relatively high levels of business, they can often negotiate terms which are as competitive or sometimes more competitive than their independent mortgage broker counterparts.

## Summary

When looking to secure mortgage funding, there are many things to consider. If we start with the basic mortgage calculator, indicating, in theory, the level of finance your income will support, there are then the different types of mortgages, different mortgage interest rates and then we have the mortgage affordability calculation.

It is advisable to prepare not only yourself but also your finances before you make a mortgage application. Remember, for the vast majority of individuals, couples and families, the purchase of a home will be their largest lifetime investment. As a consequence, you need to be ready; you need to be prepared and know exactly what you are signing up to.

## How Can The Mortgage Bank Help?

Here at The Mortgage Bank, we have partnered with some of the UK’s leading mortgage brokers.

They have already helped thousands of people get the best mortgage deal even people that have been refused before, and they can do the same for you.

Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.

If you would like to speak to one of these brokers who can provide you with a ‘whole market quote’ then click on the below and answer the very simple questions.