Mortgage affordability calculations are essential to ensure you can afford your mortgage payments now and in the future. To ensure you can meet your commitments you should understand how mortgage affordability works.
This guide will help you understand how mortgage lenders see affordability and what you can do to improve your situation. It’s worth reading before you contact our mortgage advice service.
The Financial Conduct Authority (FCA) is a UK regulatory body. It authorises and regulates financial firms and individuals. The FCA demands all mortgage lenders check mortgage applicant's ability to repay a loan.
A mortgage company uses these criteria to assess affordability:
Income - The majority of mortgage lenders will allow you to borrow 4 -4.5 times your annual income. Some lenders will go higher. That means if you earn £30,000 a year you can borrow between £120,000 and £135,000. If you find a lender that offers 5 times your salary you could borrow £150,000.
However, this is the maximum and other factors are taken into consideration.
Credit history - Your credit history will affect how much you can borrow. The higher your credit score the more confident the mortgage company will be lending you money. You’ll get the biggest range of offers, the lowest interest rates, and the highest chance of approval.
If your credit score is low, it’s usually a result of damage, done by late payments or defaults. Mortgage companies may still lend to you, but the income multiplier will be lower and the interest rate higher.
Mortgage affordability is more than just how high your income is. The amount of debt and expenditure you have are also relevant. If you want to calculate your mortgage affordability, you’ll need to follow these steps.
Multiply your annual salary by 0.28 and divide by 12
The general rule is that your mortgage or rent payment shouldn’t be any more than 28% of your gross salary. This calculation will tell you what amount that is per month.
Check your debts
Next, you’ll want to add up all your monthly debt costs. That’s loans, credit cards, and even your mortgage payment. Now, multiply your gross salary by 0.36 and divide by 12. This figure represents 36% of your income, the total monthly payments to mortgages and debt payments should be lower than this.
Calculate your expenses
Finally, make a note of all your essential monthly expenses. That’s bills that you have to pay, including shopping and an entertainment allowance. The mortgage company will want to see that this figure is less than 64% of your monthly income.
If you’re self-employed you need to make sure you have up-to-date self-assessment tax returns. This will allow lenders to verify your declared income and improve your chances of qualifying for mortgage as self-employed individual.
Before you apply for a mortgage you should evaluate your financial situation. We can help and guide you regarding what changes will improve your mortgage application.
The first step is to list all your monthly income and expenses. Make an allowance for anything you pay annually.
To ensure you list all your expenses, go through your bank statement and transfer payments to your spreadsheet, including debt repayments and any contribution to your savings.
You can deduct the expenses from your income to see how much money you have left. If the figure is negative, you need to start trimming your expenses or earn more.
Look at your current debt, it lowers your mortgage affordability. It’s a good idea to create a plan to start paying the debt down. Most people find it's best to target the smallest debt first, the feeling of accomplishment helps you target the rest.
If you have any savings, make a note of them. They can be used if you have financial difficulties in the future. Lenders like savings!
A lender will decide if you’re a suitable customer based on your debt-to-income ratio. It simply tells the lender what percentage of your monthly income goes on debt repayment. Lower is better.
There are calculators available to work out your debt-to-income ratio. In a nutshell you:
The answer is your debt-to-income ratio. Lenders prefer it to be under 36%, if it’s over 50% you’re unlikely to secure any mortgage.
The mortgage downpayments directly influence your mortgage affordability. The bigger your downpayment the greater the percentage of the house you own. More importantly, the less you have to borrow, the more confident and generous the lender will be.
After all, if you can’t repay and they repossess your home, it’s much easier for them to recoup 50% of the value than 95%.
There are several steps you can take to increase your downpayment:
Understanding mortgage affordability can be complicated. If you miss any expense it can affect the amount you think you can borrow versus what the lender will say. That’s why it’s advisable to use an online calculator, such as the Moneysprite mortgage affordability calculator.
The calculator is very easy to use, simply fill in each box indicated accurately and you’ll be told the amount a mortgage lender is likely to offer, what your monthly repayment range will be, and the value of the property you could afford.
To help ensure you get an accurate mortgage affordability result, consider doing the following:
Long-term financial planning is also a good idea. This means setting realistic goals and
sticking to them. Specifically, start to build up your savings and reduce your debts. It will help you secure the best mortgage deals and deal with any unexpected expenses or even unemployment.
It’s never too soon to start reviewing your finances and preparing for a mortgage. Get the ball rolling by contacting us for a consultation today.
Send a request and we’ll schedule a meeting
