Sometimes it feels like you have to jump through hoops to get a mortgage, but it’s actually due to how mortgage affordability is calculated. By understanding this calculation, you can determine steps to increase your chances of mortgage approval.
Getting a mortgage shouldn’t be complicated or hard work but there are UK mortgage affordability rules that lenders have to adhere to. Our mortgage advisors have written this guide to explain mortgage affordability. If you have a question reach out to our fee-free mortgage advisors.
What is mortgage affordability?
In the UK, mortgage lenders are obligated to adhere to responsible lending regulations imposed by the Financial Conduct Authority (FCA) and must assess if an individual’s financial situation can cover the loan they’re applying for. To do this, a mortgage affordability test is conducted – researching one’s income, debts and expenses in order to make sure payback is possible.
Given the drastic and long-term consequences associated with failing to make mortgage payments – including losing your property, damaging credit standing, and more – it is essential that applicants can afford their mortgages. That’s why lenders conduct a meticulous affordability assessment before issuing any approvals. Furthermore, missing monthly mortgage payments carries far greater risks than not paying rent on time; so don’t be surprised if your mortgage lender denies an application for which the proposed repayment plan resembles current rent costs!
The amount of money that can be borrowed for a mortgage is mainly determined by one’s income and expenses, however, other aspects may also have an indirect influence.
The FCA’s business responsible lending rules
The Financial Conduct Authority (FCA) has put into place regulations to make sure mortgage lenders lend in a responsible way. These affordability rules were put in place to make sure that borrowers can pay their mortgage payments now and also if rates increase to a higher interest rate. Customers must be provided with straightforward and impartial information about the fees and terms of their mortgage.
A guide to working out roughly how much you can borrow
Mortgage lenders can evaluate affordability in many different ways, as long as the process is fair to clients. Therefore, each lender will likely have a distinct approach. Usually, borrowers are able to borrow up to 4-4.5 times their annual earnings; however, if you take your time and shop around for the best deal, it’s entirely possible that you could be approved for up to 5 times your income or net profit if self-employed.
For instance, an individual with a salary of £30,000 may be able to borrow anywhere from £120,000 all the way up to a £150,000 mortgage. Note that this amount could differ depending on your mortgage provider’s policies and specific details of your personal circumstances.
Joint mortgage affordability
When applying for a mortgage alongside someone else, the provider will typically take into account both applicants’ combined annual income. This allows potential borrowers to borrow more since their loan amount is based on both incomes instead of just one individual’s salary. Thus, by including two sources of earnings in their assessment of affordability, couples are able to maximize their borrowing potential and gain access to larger mortgages than if they had applied alone.
For instance, two applicants earning an annual salary of £30,000 may be eligible to borrow up to a total of between £240,000 and £300,000.
It is important to keep in mind that this is just a general guideline and the actual borrowing amount may vary based on both the lender’s policies and your individual profile.
Mortgage affordability calculator
What affects mortgage affordability?
Planning to buy a home? Our mortgage advisors have compiled the 10 critical factors that will affect your ability to afford a mortgage. Keep these details in mind when you are calculating how much house you can realistically purchase:
- Income: A higher income generally means that you will be able to borrow more, as mortgage lenders consider your ability to afford mortgage repayments.
- Debts: Lenders will consider any outstanding debts you have, such as credit card balances and personal loans, when determining your ability to afford a mortgage.
- Credit score: A sound credit report and high credit score may make you a more attractive borrower to lenders, as it demonstrates your creditworthiness and ability to manage debt.
- Deposit: A larger down payment can reduce the size of the mortgage loan you need and make it easier to afford mortgage repayments.
- Interest rate: A lower interest rate means lower monthly repayments, which can make it easier to afford the loan.
- Employment status: While a lender’s maximum income multiple stays consistent regardless of employment status, they may take greater caution with self-employed or non-salaried sources of revenue due to the potential for instability. This can affect their affordability assessment when looking at these forms of income.
- Loan to value: When securing a mortgage, the loan-to-value (LTV) ratio reflects how much of the property’s cost is being borrowed. Certain mortgage lenders may provide increased income multiples for mortgages with lower LTVs (such as below 85%). Not only that, but your LTV will also impact what interest rate is available to you.
- Property location: The location of the property you are buying can affect mortgage affordability, as home prices can vary significantly from one area to another.
- Property type: The type of house you purchase, whether it is a single-family home or condo, can have an impact on what kind of mortgage you are eligible for.
- Mortgage term: When it comes to mortgages, the duration of your term can significantly influence affordability. Opting for a longer-term often results in lower payments but with an increased total cost from interest rates over time.
When establishing a budget, it’s essential to think about these factors and work with an experienced mortgage provider or mortgage broker to discover the right loan that fits your financial plan and objectives while also providing you access to optimal interest rates.
Speak to a mortgage broker about your affordability
Whether you’re a first-time buyer looking to get on the property ladder or looking to refinance, UK mortgage brokers are there to provide expert advice and assistance. Through careful analysis of your financial situation, they can help determine the most suited mortgage product for you that meets both your budgetary needs and preferences. Furthermore, experienced brokers will negotiate with mortgage lenders on your behalf in order to secure the best terms and interest rates possible!
If you’re navigating through the complex mortgage process and searching for the best deal possible, a mortgage broker can be your knight in shining armour! Not only are they experts in their field, but they will take out all of the guesswork so that you don’t have to. They’ll give you an overview of different types of mortgages and help identify which one is most suitable for meeting your financial objectives — saving both time and effort on your part.
FAQs
What is the mortgage affordability rule?
The UK financial system relies on the mortgage affordability rule to help lenders decide how much money they can lend out. This assessment takes into account several mortgage underwriting standards including such as a borrower’s income, debts, and credit score, combined with the property type and worth. With this guideline in place, everyone is treated fairly regardless of their unique situation so that potential homeowners have access to secure mortgages. All this has been put in place to protect borrowers and save any issues paying their mortgage in the future.
Before you submit a mortgage application, it’s essential to consider your budget and finances. The affordability rule and underwriting standards are created with the purpose of preventing borrowers from accumulating excessive debt or struggling to make their payments. Conducting due diligence on your financial status prior to applying for a loan will help of being accepted for mortgage approval and guarantee that you remain financially secure in the long-term.
How is mortgage affordability calculated?
UK lenders determine mortgage affordability using a combination of factors, such as your income, credit score and report, and debt-to-income (DTI) ratio. To calculate the DTI ratio for yourself – take your total monthly debt payments including the proposed mortgage payment – then divide it by your gross monthly income (before taxes). The percentage that you get is what we call ‘Debt to Income Ratio’, which UK lenders use to assess one’s eligibility for getting a mortgage.
To determine your Debt-To-Income (DTI) ratio, take the total of all monthly debt payments and divide it by your gross income. For example, if you owe a total payment of £1,000 each month on top of other debts while earning £3,000 in salary per month; then 33% would be your DTI ratio. Although most lenders prefer to keep this number under 43%, some are willing to accept higher ratios depending on certain factors like credit history or the type of loan sought after.
Why is it important to prove that borrowers can afford mortgage payments?
It is imperative to prove that borrowers can manage the financial responsibility of a mortgage as these loans usually span several years. If borrowers underestimate their ability to repay, they may find themselves in too deep and risk losing their homes or experiencing severe economic hardship. Taking on more debt than you are prepared for could lead to disaster – so be sure you understand your own financial limits before signing any contracts!
When affordability is not monitored, it can also have far-reaching economic effects such as expanding household debt and financial insecurity. However, by examining loan applicants’ ability to pay back the money even with fluctuating interest rates or changing situations, lenders guarantee that borrowers are able to meet their obligations while minimizing the chance of unpaid loans – thus fostering responsible lending practices.
Will affordability affect the interest rate offered by a lender?
When carrying out affordability tests on your mortgage application, affordability is established using an interest rate that might be required to be paid in the event of a Bank of England’s interest rates increase above the lender’s standard average interest rate. A lower loan-to-value will have a significant impact on your chances of mortgage approval and a lower mortgage rate.
