Being able to afford a mortgage is no longer solely reliant on having a large enough income and deposit. While this is still important, getting your financial circumstances and credit report into good shape will also increase the likelihood of being able to afford a mortgage suitable 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.
At the time of writing (2020), lots of lenders have further tightened up their criteria in the wake of the Covid-19 pandemic, which has plunged the economy into recession and left many people’s jobs at risk.
The amount of deposit you need depends on two key factors:
How much is the home you want to buy
What can you afford to pay in monthly mortgage repayments?
The amount you need to borrow in relation to the value of the property is known as the Loan to Value (LTV) ratio. 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% of the property value 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 too. 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 produce a 20% deposit, you may also find you need to consider more creative options such as a family offset mortgage, as many lenders have pulled their 90% LTV mortgage deals due to Covid-19.
The government-backed Help to Buy: Equity Loan scheme aims to help those 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 current version of the scheme offers the loans at 0% interest for the first five years and will end on 1 April 2021. A new scheme will then be available until 31 March 2023.
There’s also a Help to Buy: Shared Ownership scheme for new builds or properties being sold on by housing associations. With it, you can buy a 25% to 75% share in the property and pay rent on the rest. When you can afford to, you can then buy the rest of the property. It’s only open to households that earn £80,000 or less a year (or £90,000 or less in London).
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, perhaps because 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, for example because 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 income multiple is generally slightly lower. So if your joint income is £70,000, the maximum mortgage you might be offered will probably be closer to £250,000 than £280,000.
Whatever your circumstances, using an online mortgage calculator is the easiest way to get an idea how big a mortgage you can get.
The best ways to improve your chances of being approved for a mortgage are:
Have a high credit score (you can improve this 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%
Have a high enough income to ensure that you still have at least 65% of your money left after your monthly mortgage payment
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 know exactly how much your repayments will be for a set period of say three or five years. In an ideal world, you should also have enough savings to cover at least a few months’ mortgage repayments just in case you fall ill or lose your job.