When looking to purchase a property, either for the first time or as a home move, perhaps the most important thing to understand is how big a mortgage you are likely to get as this is fundamentally the limiting factor in terms of the properties you will be looking at. The thing is there is no simple answer as how much a lender will lend you, it depends on a lot of factors. In this guide we will take a look at some of these factors and also give you a rough guide on current lending criteria.
Mortgage rules of thumb
The first rule of thumb you should bear in mind is that you want to try to keep your mortgage payments, if at all possible, to less than 30% of your total net monthly salary. If you go higher than this, you might end up, especially if interest rates increase, not being to afford the running costs for your property. You should also look at what the expected household bills will be, such as council tax, gas, water, electricity, building and contents insurance, TV licence and broadband. If your mortgage payments and the household bills are creeping up to 50% of your net income, then you are in danger of not being able to afford the property and should look to reduce the mortgage amount you apply for.
Most lenders will, in principle lend the same levels of salary multiples. This simply means how many times your salary they are likely to lend as a sum. This is between 3 and 4.5 individual salary and 4x joint salaries. So, if for example your joint family income is £50,000 you could get a mortgage of up to £200,000.
Factors affecting affordability
When considering how much they would be willing to lend to someone, lenders will take a few factors into account such as:
- Income vs outgoings. They won’t need to know every tiny detail of your expenditure but will look at any loans you have, credit card debt, store card debt, child maintenance payments and take a view on your fuel and food bills. This will allow them to assess how much they feel you can afford.
- Your credit score will play an important role, if you have missed payments, are not on the electoral register, have had credit refused, then lenders are less likely to lend to you or, if they do, will charge higher rates of interest
- Amount of deposit that you have. The larger the deposit the more likely a lender is to lend as this reduces their risk of the property going into negative equity (where the value of the property is less than the outstanding mortgage)
- Many mortgage lenders will stress test your payments against an interest rate hike. So, whilst you might be able to afford the payments at the current rate, would you be able to afford them if the interest rates doubled? Many lenders will lend to the stress test affordability rather than the current rate affordability which could reduce what they are willing to lend.
So, what can I afford?
Until you go to a mortgage lender and apply either for a full mortgage or a decision in principle, you won’t know the exact figure that you could afford. There are, however, plenty of online mortgage affordability calculators on the internet. This affordability calculator from Moneyhelper.co.uk will give a reasonable indication as to how much you are likely to be able to borrow. This is not, however a guarantee that a lender will lend you that sum, it is just an indication.
Making sure that you can afford the mortgage repayments and also the running costs of your home is an important factor when looking for a property to buy and having an indication as to how much you could borrow will help you understand what sort of property you can afford. Using an online calculator will give you a good guide, but it is worth talking to a mortgage broker or an independent financial advisor who will also be able to advise you.
