Good deposit doesn’t get you good mortgage

Here is a little story which is, as many commentators say, not newsworthy:

It’s about a renter who loses out on a flat after another bidder pays two years’ rent upfront. The story is nothing new or interesting in our free private renting market. But it does display some people’s misunderstanding towards getting a mortgage.

The monthly rent of the flat is £2,000. The upfront rent for two years is £48,000. The renter exclaims:”(that amount) is a whole mortgage (deposit)”. Other replies to the renter’s post include “why the person was not buying a property instead” or “That’s double the money you need for a deposit”.

All these comments from the story and the replies unveil a big misconception. The fact you have sufficient deposit doesn’t necessarily mean you can get a mortgage you need. For a person to get a residential mortgage, his/her income is the most important factor. The typical mortgage you can get is within the range of 4-5 times your income. Of course other factors will be taken into consideration and will affect the mortgage amount.

In this story, the competing bidder has got a good sum of cash, but his income is not revealed. He/she may have an annual salary as high as £200K or as low as £40K. The flat is in Muswell Hill in London. It’s an expensive neighbourhood in London. We can safely assume the market value of the flat is £800K. For a property buyer to get a £750K mortgage, the income should be at a level similar to £150K!

The income level of a person has nothing to do with how much cash that person has in hand. The cash could be savings, family gift or inheritance, etc. There is significant likelihood this bidder can’t afford the mortgage needed to own this flat, not that he/she doesn’t want to.