Are you tired of paying soaring rents that seem to drain your finances month after month, especially in cities like London where the average rent exceeds £2,000? If you’re dreaming of owning your own home but feel stuck in a frustrating cycle, you’re not alone.Â
Understanding mortgage affordability is essential for turning that dream into reality. This guide explores the complexities of mortgage affordability assessments, equipping you with the insights needed to determine how much you can borrow and how to boost your chances of securing a mortgage.Â
Whether you’re a first-time buyer or considering remortgaging, we’re here to help you navigate your path to homeownership with confidence and clarity.
What Do We Mean by Mortgage Affordability?
Mortgage affordability refers to the lender’s assessment of whether you can repay the loan you wish to take out, considering your income, outgoings, and any existing debts. The Financial Conduct Authority (FCA) mandates that mortgage lenders carry out this assessment to prevent borrowers from overextending themselves financially.
The consequences of taking on a mortgage that you cannot afford can be dire, including the risk of losing your home and significantly damaging your credit record. Because of these potential repercussions, lenders often conduct rigorous affordability assessments.Â
It’s worth noting that falling behind on mortgage repayments is typically considered a greater risk than defaulting on rent payments, which is why many lenders are cautious in their evaluations.
How Much Can You Borrow?
Lenders have the flexibility to assess affordability according to their own criteria, which means there can be significant variation in how much different lenders are willing to offer. On average, most applicants can borrow up to 4 to 4.5 times their annual income, but strong applicants might secure up to five times their income with diligent research.
For example, if you earn £30,000 annually, you could expect to borrow between £120,000 and £150,000. Below is a breakdown of potential borrowing amounts based on annual income:
Annual Income | Income x 4 | Income x 4.5 | Income x 5 |
£20,000 | £80,000 | £90,000 | £100,000 |
£30,000 | £120,000 | £135,000 | £150,000 |
£40,000 | £160,000 | £180,000 | £200,000 |
£50,000 | £200,000 | £225,000 | £250,000 |
£60,000 | £240,000 | £270,000 | £300,000 |
£70,000 | £280,000 | £315,000 | £350,000 |
£80,000 | £320,000 | £360,000 | £400,000 |
How Much Could You Borrow as a Joint Applicant?
If you’re purchasing a property with another person, the lender typically assesses your combined income. For instance, if you and your partner each earn £30,000, you could potentially borrow between £240,000 and £300,000.
How a Broker Can Help Secure the Lending You Need
If you’re uncertain about your chances of passing the affordability assessment, enlisting the help of a mortgage broker can be invaluable. Here’s how a broker can assist you:
1. Individual Advice
A mortgage broker will assess your financial situation—including your income, debts, and spending habits—to provide tailored advice on how different lenders might view your application. If a lender has declined your application or is offering less than you need, a broker can offer insights and solutions.
2. Market Knowledge
With access to the entire mortgage market, a broker can identify all available deals and compare them for you. If one lender offers a borrowing limit of four times your income, a broker may help you find another willing to offer five times.
3. Practical Suggestions
Brokers can also offer tips on how to maximise your mortgage affordability. For instance, they can inform you about income types you might not have considered declaring on your application, such as spousal support or disability allowances.
If you’re interested, we can arrange for a broker to contact you directly for a free, no-obligation consultation.
Factors Directly Affecting Mortgage Affordability
While income is typically the most significant factor in determining mortgage affordability, several other elements can influence your borrowing capacity:
Debts: Existing debts can significantly impact your mortgage application. If your monthly debt repayments exceed 50% of your income, you may struggle to secure a mortgage. It might be wise to reduce your debts before applying for a mortgage.
Spending: High monthly outgoings can also limit the amount you can borrow. Lenders will scrutinise your spending on essentials such as bills, groceries, and leisure activities. Keeping your spending in check for several months before applying could be beneficial.
Factors Indirectly Impacting Mortgage Affordability
Other eligibility factors can indirectly affect your borrowing capacity by limiting the lenders and deals available to you. Here are some examples:
Credit History
A strong credit history opens the door to more lenders and mortgage products. If your credit report shows minor issues—like late payments or defaults—you may be offered a lower borrowing multiple. Severe issues such as bankruptcy may lead some lenders to decline your application altogether.
Employment Status
Your employment status can also affect how lenders assess your income. Self-employed individuals or those with variable income may find that lenders are cautious, often taking an average of income over previous years rather than relying on current figures alone.
Loan-to-Value Ratio (LTV)
The loan-to-value ratio is another crucial factor in determining mortgage affordability. It represents the percentage of the property’s value that you will be borrowing. For example, if you want to buy a property worth £200,000 and take out a mortgage of £180,000, your LTV would be 90%.
Generally, lenders are more likely to offer higher income multiples for mortgages with a lower LTV (e.g., below 85%). This means that first-time buyers often face more challenges, as they typically have smaller deposits and, consequently, higher LTV ratios.Â
However, if you have equity in your current home to put towards a new property, you may find it easier to secure a favourable mortgage.
Profession
Certain professions may qualify for more advantageous mortgage terms. Lenders sometimes provide higher income multiples to professionals in specific fields, such as doctors, lawyers, and accountants. These professionals often fall within a certain age bracket (typically 25-40), which can further influence their borrowing capacity.
What About Buy-to-Let Mortgages?
Buy-to-let mortgages come with their own set of affordability criteria. Since most of your income for these mortgages will come from rental payments rather than your employment income, lenders will focus primarily on your expected rental income.
Moreover, buy-to-let mortgages are frequently structured as interest-only loans, meaning you only pay the interest during the mortgage term. This can make it easier to meet the lender’s affordability requirements, as your monthly repayments will be lower than a capital repayment mortgage.
Considerations for Buy-to-Let Mortgages:
- Rental Income: Lenders typically require that the rental income covers 125% to 145% of the mortgage payment.
- Personal Income: While rental income is crucial, some lenders may also consider your personal income when assessing your overall financial position.
Mortgage Affordability for Second Homes
When applying for a mortgage on a second home, lenders will expect you to demonstrate that you can afford repayments on both properties. This usually means they will look for a larger deposit and may be more cautious in their approval process.
Tips for Securing a Second Home Mortgage:
- Larger Deposit: Saving for a larger deposit can significantly enhance your chances of mortgage approval.
- Proof of Affordability: Be prepared to show that you can manage the financial burden of both mortgages without overstretching yourself.
Affordability When Remortgaging
Remortgaging, or switching to a new lender for a better interest rate, still hinges primarily on your income and outgoings. Many homeowners choose to remortgage when they reach the end of an introductory period (usually after two, three, or five years). However, with rising living costs and interest rates, you may find it challenging to meet a new lender’s affordability criteria.
If you’re in a position where you can no longer demonstrate that you can afford your mortgage, even if you could when you first took it out, you may be stuck with a higher rate. In such cases, consulting a broker is highly advisable. They can offer alternative options and help you navigate this complex landscape.
Finding the Right Broker
Finding a broker who specialises in the type of mortgage you need is crucial for getting the best deal. Whether you’re looking for a high-LTV mortgage, a buy-to-let mortgage, or have unique financial circumstances, working with an expert can make a significant difference. A knowledgeable broker will not only help you identify the best mortgage products but also provide valuable insights and tips tailored to your situation.
How Mortgage Knight Can Help?
If you’re looking for expert guidance throughout your mortgage journey, Mortgage Knight can provide the assistance you need. With their extensive market knowledge and dedication to customer service, they can help you secure the right mortgage for your unique situation.Â
Whether you’re a first-time buyer, looking to remortgage, or interested in buy-to-let properties, their team of experienced advisors will ensure you make informed decisions every step of the way.
