The value of the home you want to buy combined with the size of your income and deposit, plus the state of your credit history and personal circumstances will determine whether or not you can afford a mortgage.
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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 improve your chances and increase the likelihood of being able to afford a mortgage suitable for the home you want to buy.
In this guide we explain what the affordability criteria is for a mortgage, and what you can do to improve your chances of passing the application tests.
What are the affordability criteria for a mortgage?
Since the 2008 crash, there have been a number of measures brought in to rein in the financial market, in particular the way mortgages are approved.
In 2014 the Mortgage Market Review (MMR) came into effect, although many lenders had started to implement those changes earlier, and some have rules of their own that go beyond what the MMR proposed.
As a result, the minimum criteria for affording a mortgage has become tougher, meaning your application will be subject to checks that go beyond looking at your income and deposit.
The biggest check is on your lifestyle spending and current outstanding debts. This means that even a gym membership of TV subscription would be factored into your day to day living costs and be subtracted from how much you are likely to be able to spend on your monthly mortgage repayments, and have left over to live on.
Mortgage lenders want to be sure that you also have enough money left over just in case interest rates suddenly rise, or your personal circumstances dramatically change, such as having a baby, a death in the family or losing your job.
Debts such as credit cards and other bills will also be factored into your application. Lenders will want to look at how much you spend on average on your credit cards and how much debt you currently have outstanding to also determine if you will have enough money left over.
How much deposit do I need?
The amount of deposit you need depends on two key factors: how much is the home you want to buy and what can you afford in monthly mortgage repayments?
The key is to go for a Loan to Value ratio (LTV) that is around the 60-70% mark. But you can get mortgages with an LTV of even 95%. The higher the LTV then the more risk there is for the mortgage lender.
Essentially, the higher your deposit, the lower your LTV will be, but this depends on the value of the home you want to buy. So for example, if you were looking to buy a home worth £200,000, and you had a deposit of £20,000, then you would need a mortgage of £180,000, putting your LTV at 90%. However, if you had a deposit of £50,000, then your LTV would be at 75%, giving you access to more of the cheaper deals on the mortgage market.
This is where your income and what you can afford on monthly mortgage repayments becomes an important factor. If your LTV is lower, your interest rate will be lower, and therefore your monthly payments will be lower.
If your income is lower than what might be considered ideal by the mortgage provider (see 'What are the income requirements?' below) then having a larger deposit will make a big difference to improving your chances of being approved.
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.
However, there are some government schemes that could help boost your deposit or reduce the risk on a higher LTV.
Help to buy and government deposit boosting schemes
Help to buy is a government scheme that helps to boost your deposit by guaranteeing a portion of the mortgage, and thereby making it possible, in some cases, to get a 95% LTV mortgage at a relatively low rate.
This is sometimes known as the Help to buy mortgage guarantee scheme.
There are other government schemes that allow, mostly first time buyers (although some are open to everyone), to buy a home with a smaller deposit. These include the part buy part rent or rent to buy schemes, where you can own a portion of the property, and pay your rent and your mortgage together.
As a result, the prices are lower and the mortgage repayments are not as high, and you can work your way towards buying more of the property's shares.
What are the income requirements?
As a general rule, your mortgage affordability is calculated as your salary times by four. In some cases, mortgage lenders might be willing to lend you more (because you have a large deposit and a good credit rating) and in some cases they will give you less (for having a small deposit or a less than perfect credit score).
If, for example, your salary is £35,000 per year, then you might be able to get a mortgage of £140,000, possibly more.
If you are buying with a partner, and their salary is also £35,000, then your combined income would be £70,000 per year. However, mortgage lenders will calculate this slightly lower, so you would be looking at an affordability range of around £200,000 to £250,000.
How can I boost my chances of approval?
Your best options to improve your chances of being approved for a mortgage are having a very high credit score, a large enough deposit to get your LTV down to around 60%, and a high enough income to ensure that you still have over 65% of your money left at the end of each monthly mortgage payment.
A simple thing you can do right away is to ensure that you are registered on the electoral roll where you live, which will improve your credit score. Also, check that you don't have too many outstanding debts or unused credit cards.
Consider the future
To really boost your mortgage approval chances, plan for the future and take some time before applying.
Do your research on the mortgage market and how changes to your own circumstances or to the bank rate could impact your finances.
Do your own stress test before you get to the mortgage application process. Budget and prepare your finances and calculate how much money you would have left over after making monthly mortgage repayments.
Then see how much you might still have left over if you were suddenly out of work for three months, or even longer. Do you have savings to help cover you for a few months in case of an emergency? What might happen if you decided to have a baby?
If your finances can survive these tests, then you will give yourself a far better chance of affording the mortgage you need to buy the home you want.
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