Mortgage Affordability: What mortgage can I get?
Your mortgage affordability represents how much a bank will be willing to lend to you. Fundamentally, affordability is a calculation of income less expenditure, but several factors come into the equation which we will explore. Once you know this figure, you can add this to how much deposit you have, or will have, and this gives you the maximum property price you can afford. The first step when looking for a new home should be to determine your affordability, otherwise you could be wasting your time looking at properties outside your budget – unfortunately!
Affordability for a residential mortgage on a home for you to live in is calculated differently than for a BTL mortgage for a property you will rent out. The latter is assessed based off the expected rental income for the property. This blog will focus on residential affordability for those looking to buy their first home or take the next step on the property ladder.
The formula for calculating affordability is different for each mortgage lender. Factors they take into consideration, such as dependants, credit commitments and the length of the mortgage all affect affordability differently depending on which lender you ask. This explains why when you try running a bank’s online affordability calculator, you can get wildly different figures depending on which bank’s calculator you use.
Now to the numbers…
As a rule of thumb, banks typically lend 4.5x your combined household income, less any unpaid debts which includes loans, finance deals and credit card debts not cleared every month. How much is deducted for these is calculated on the size of the debt or how much you’re paying per month. Most lenders are happy to ignore student loans in the calculation, so this need not be a cause for concern! However, having dependants can affect your borrowing.
4.5x income isn’t always the limit however. At the time of writing this blog, a selection of lenders will do 4.75x income and some even 5x income. Naturally this is not available for everyone as it is dependent on having a larger deposit and larger income – but it is more attainable than you may think! At the time of writing this blog, the following options are available:
- Income over £30k with a 10% deposit, eligible for a mortgage 4.75x income
- Income over £50k with a 25% deposit, eligible for a mortgage 5x income
- Income over £75k with a 15% deposit, eligible for a mortgage 5x income
The above figures are examples of what’s available and any application is subject to credit scoring and underwriting. To find out whether you’re eligible and to get an idea of your own affordability, it’s certainly worth having a chat with us. Remember, the banks want to lend – it’s how they make money!