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Mortgage affordability: A comprehensive guide

Mortgage affordability relates to tests carried out by mortgage lenders to ensure prospective borrowers can afford the loan they require to buy a property. It’s an important aspect of the assessments carried out by mortgage lenders, which can lead to a mortgage application approval or rejection.

It’s not as simple as earning more than your projected essential expenses, including, of course, your estimated mortgage repayments. Mortgage affordability is a hot topic among home buyers so we’ve created this comprehensive guide to explain everything you need to know.

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Did you know…

The Office for National Statistics (ONS) states that in 2022, full-time workers in England could buy a property worth up to 8.2 times their annual income, whereas it was up to 6.2 times their annual salary in Wales.

Mortgage affordability considerations

Mortgage affordability is more complicated than the calculation above, and all aspiring home buyers need to know the finer details…

Before lenders can calculate your mortgage affordability, they must first understand your personal financial situation. This will require you to prove your regular income and evidence of your expenses, including any outstanding debts or student loans.

Here is a more comprehensive list of mortgage affordability considerations:

  • Monthly income
  • Monthly expenses
  • Debt-to-income ratio
  • Deposit
  • Savings
  • Interest rate
  • Loan term

Mortgage applicants must be open and honest at this stage. Trying to inflate income or hide debts and regular expenses can not only lead to a mortgage rejection but also, if you do manage to get approval, it could make your mortgage repayment unaffordable, leading to defaults and even repossession and bankruptcy.

No matter how much your finances would allow you to borrow, lenders typically don’t allow you to borrow more than 80% of the value of the property you want to buy, meaning you have to have a deposit of 20%. This is known as the Loan-to-Value (LTV) ratio. Some lenders do offer more than 80% LTV, especially when combined with government home-buying schemes.

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Understanding mortgage affordability

Once a mortgage lender understands your finances, they can use this information to determine how much you can afford to borrow based on the interest rates offered on their mortgage deals. The lender will work out your mortgage affordability based on a percentage of your disposable monthly income. Just because you have £1,500 per month of disposable income doesn’t mean you can afford a monthly mortgage repayment of £1,500.

Moreover, lenders are required by the Financial Conduct Authority (FCA) to apply stress tests to ensure buyers can still afford mortgage repayments if interest rates were to increase. Stress tests were introduced after the 2008 World Financial Crisis when many homeowners could no longer repay their mortgages with higher interest rates and ended up losing their homes.

There isn’t a universal, fixed stress test percentage applied by all lenders but, in most cases, they will want to ensure you can still repay the loan if interest rates rise by as much as 8%. This can seem excessive, but it is for the safety of the home buyer as well as the lender. It may also be why your mortgage affordability is less than expected.

Other factors can also influence mortgage affordability. For example, having a temporary employment contract could reduce your affordability compared to someone with a permanent one. We’ve highlighted some of the other possible considerations a lender makes below.

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Calculating your mortgage affordability

So, how do you calculate your mortgage affordability? Because lenders may apply different affordability tests and varying degrees of stress tests, you can get an overview of your mortgage affordability by speaking with a qualified mortgage adviser. Professional financial advisers working in the mortgage market can analyse your personal finances and carry out tests identical to the ones carried out by mortgage lenders, giving you a realistic estimate of how much you could borrow.

Another method to calculate your mortgage affordability is to use mortgage affordability calculators found on lender websites or other money-focused websites like MoneyHelper. We even have one of our own which you can find here. These calculators require you to input your basic financial situation and will then reveal how much you could afford to borrow based on a specific loan term and interest rate. The calculator should also state how much your monthly repayments will be.

However, be aware that basic mortgage affordability calculators are not 100% accurate. They don’t account for individual circumstances which can affect mortgage affordability, therefore they should be used as a guide only and you should always speak to a mortgage adviser for a more personalised mortgage affordability assessment.

Preparing for homeownership

There are various strategies that you could use to increase mortgage affordability. You might not be able to get a pay rise, but you could work to reduce your level of debt before applying, which may also improve your credit rating. Other options include waiting to save more so you can access mortgages with a lower interest rate or by increasing your mortgage repayment term.

These techniques and others are best discussed with a trusted mortgage adviser. Speak with our team to learn more in your own personal mortgage consultation with no obligations.

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