In this guide, we will explore what mortgage affordability really means, how lenders determine it, and importantly, practical strategies you can use to improve it.
Don’t confuse mortgage eligibility with affordability. There’s a significant difference between what a lender might be willing to offer and what is realistically affordable.
What Does Mortgage Affordability Mean?
Mortgage affordability goes beyond the simple calculation of whether you can take out a mortgage based on 4 times your annual earnings.
It’s about understanding whether you can comfortably manage your mortgage payments, alongside other financial commitments like existing debts, household bills, childcare, and general living expenses.
When assessing affordability, lenders look at your entire financial situation. This includes your income, regular expenditures, debts, and even lifestyle costs. The idea is to ensure that taking on a mortgage will not overburden your finances.
It’s important to understand the implications of borrowing more than you can afford.
If you struggle to keep up with mortgage payments, it can negatively impact your credit score for up to six years. This not only affects your current mortgage but also your ability to borrow in the future for any purpose, from remortgaging to personal loans.
In extreme cases, failure to make mortgage payments can lead to your home being repossessed.
How Lenders Work Out Affordability
When you apply for a mortgage, lenders conduct a thorough examination of your financial circumstances to determine how much they can responsibly lend you. This process is known as assessing mortgage affordability.
Income
The primary factor is your income. Lenders often use a multiple of your annual income to get an initial figure for how much you could borrow. While this multiple can vary, a common benchmark is around four to four-and-a-half times your annual income. However, this is just a starting point and doesn’t guarantee the loan amount.
Spending
Your regular spending habits are scrutinised to assess how much disposable income you have. Lenders review your outgoing expenses, including bills, groceries, subscriptions, and even leisure activities, to gauge how much you can realistically afford to pay towards a mortgage each month. Your online gambling, Just Eat payments and gym membership will all be included.
Stress Testing
This involves checking your ability to continue paying your mortgage if circumstances change. Lenders might consider scenarios like interest rate increases, changes in your employment status, or other factors that could impact your ability to pay.
Debt-to-Income Ratio
Your existing debts play a significant role in the assessment. Lenders look at your debt-to-income ratio, which is the percentage of your income that goes towards debt repayment. A lower ratio is preferable as it indicates that you have more disposable income to service a mortgage.
Using an Affordability Calculator
An affordability calculator is a useful tool that can give you an initial estimate of how much you might be able to borrow for a mortgage.
It’s something you would use before you start looking for a mortgage (or a house).
Our mortgage affordability calculator will take your income, and your expenses, and then show you how much you could borrow.
Remember, the figure you get from an affordability calculator is an estimate, not a guarantee of what a lender will offer you.
10 Ways to Improve Your Mortgage Affordability
- Increase Your Income. This might involve seeking a higher-paying job, working additional hours, or starting a side hustle.
- Reduce Your Debts. Paying off existing unsecured debts, especially high-interest ones, will lower your debt-to-income ratio, making you more attractive to lenders.
- Improve Your Credit Score. A good credit score can make a substantial difference. Ensure you’re on the electoral roll, pay bills on time, and check your credit report for any inaccuracies.
- Save for a Larger Deposit. The more you can put down as a deposit, the less you need to borrow, which will improve your affordability.
- Cut Unnecessary Expenditure. Review your spending habits and cut back on non-essential items. This can free up more income for your mortgage.
- Consider a Longer Mortgage Term. While this means paying more interest over time, a longer term will reduce the monthly payments and improve immediate affordability.
- Look for Joint Mortgage Options. Buying with a partner or a friend can combine incomes, increasing the amount you can collectively borrow.
- Consider guarantor schemes. Having a guarantor on board will normally improve your affordability and allow you to borrow more.
- Check for Better Mortgage Deals. Shopping around for a mortgage with lower interest rates or better terms can make a significant difference.
- Use a Mortgage Broker. Broker’s can look for lenders that offer enhanced income multiples that better suit your situation.
Have a chat with us
Getting a mortgage can be tricky, but if you understand how much you can afford and how to make your financial situation look better to lenders, it really helps.
Remember, it’s not just about getting a mortgage; it’s about being able to pay it back comfortably.
We know a lot about mortgages and can help find the best one for you. We’re here to make sure that getting a mortgage isn’t too stressful or confusing.
OR CALL US ON 020 8301 7930
- About the Author
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Sean Horton is a co-owner of Drake Mortgages and has worked in financial services, mortgages and insurance since 1988. Previously a financial adviser and a mortgage broker, he regularly writes about mortgages, bridging loans and commercial finance.
