Being able to afford a mortgage isn’t just down to having a large enough income and deposit. While this is still important, getting your finances and credit rating into good shape will also increase the likelihood that you’ll be able to afford a big enough mortgage for the home you want to buy.
Whether or not you can afford a mortgage will depend on:
The value of the home you want to buy
The size of your deposit
The level of your income
Your employment status
Your credit score
Your other debts and financial commitments
In this guide, we explain the affordability criteria for a mortgage and look at how you can improve your chances of making a successful mortgage application.
Since the Mortgage Market Review (MMR) came into effect in 2014, the affordability checks you have to go through to get a mortgage have become much more stringent.
As a result, lenders will take all your spending into account when calculating what mortgage you can afford. So even a monthly gym membership will be subtracted from how much you are likely to be able to spend on monthly mortgage repayments.
Debts such as credit cards and other bills will also be factored in, as will your ability to keep paying your monthly repayments should interest rates suddenly rise, or your personal circumstances change.
In the wake of the Covid-19 pandemic, which plunged the economy into recession and left many people’s jobs at risk, lenders further tightened up their criteria and are still more cautious when it comes to lending to self-employed borrowers.
The amount of deposit you need depends on three key factors:
The price of the home you want to buy
What you can afford to pay in monthly mortgage repayments
The maximum loan to value (LTV) you can borrow
The loan to value is the amount you are borrowing in relation to the value of the property. The higher this is, the more risk the lender is taking on by offering you a mortgage. A lower LTV of say 50% to 60% will therefore give you access to the best mortgage deals.
If your income is on the low side, a larger deposit will also improve your chances of being approved because qualifying for lower mortgage rates will help to reduce the size of your monthly repayments. Similarly, if you have a less-than-perfect credit score, you could boost your chances with a bigger deposit, as you will be reducing some of the risk being taken by the mortgage lender.
If you’re unable to pay a big enough deposit, you may need to consider more creative options such as a family offset mortgage. These allow family members to use their savings to reduce the amount of mortgage you are charged interest on.
The government-backed Help to Buy: Equity Loan scheme aims to help first-time buyers in England with low deposits get on the housing ladder. If, for example, you only have a 5% deposit, you can borrow 20% (or 40% in London) of the cost of your home from the government, then take out a mortgage for the remainder.
Only available on new-build homes, the scheme offers the loans at 0% interest for the first five years and will end on 31 March 2023.
There’s also a Shared Ownership scheme for new builds or properties being sold on by housing associations. With it, you can buy a 10% to 75% share in the property and pay rent on the rest. As and when you can afford to, you can then buy more of the property. It’s only open to households that earn £80,000 or less a year (or £90,000 or less in London).
There are similar schemes in other parts of the UK.
You can get an idea of how much you are likely to be able to borrow from a mortgage lender by multiplying your annual salary by four. So say you earn £30,000 a year, the maximum mortgage you’re likely to be able to get is £120,000.
In some cases, mortgage lenders might be willing to lend you more than four times your salary, especially if you have a large deposit or a very good credit score. In other cases, they will not be prepared to go to four times your salary, such as if you have a low credit score.
If you are buying with someone else, such as a partner, the amount you can borrow via a joint mortgage will also be based on your salaries along with your outgoings and credit histories. However, the overall income multiple may be slightly lower.
Although income multiples are used to calculate the maximum a lender might lend you, whether you can actually borrow this much ultimately depends on affordability and whether the lender thinks you are likely to be able to pay the mortgage back within the relevant time frame based on your financial situation and credit history.
Whatever your circumstances, using an online mortgage calculator is the easiest way to get an idea of how big a mortgage you can get.
Follow our tips to improve your chances of being approved for a mortgage:
If you don’t have a good credit score, boost it by paying down any credit card debts and ensuring you’re correctly registered on the electoral roll
Save up a large enough deposit to get your LTV down to around 60%. If you can’t manage this, reduce it to as low a percentage as possible
Make sure you would still have at least 65% of your money left each month after your mortgage repayment. This could mean reducing the size of the mortgage you’re applying for
While you want to be able to afford the first home of your dreams, you don’t want to end up struggling to meet the costs of living there. So think about how changes to your own circumstances or to the interest rate you pay could impact your finances.
If you’re on a tight budget, a fixed-rate mortgage could prove a sensible choice as it means you’ll know exactly how much your repayments will be for a set period of say two or five years. In an ideal world, you should also have enough savings to cover at least a few months’ mortgage repayments in case you fall ill or lose your job.