The Bank of England estimates that around four million households will be exposed to mortgage rate rises, and coupled with rising costs of living, it will be harder to afford mortgage repayments over 2023.
With inflation currently elevated, it’s vital to know your mortgage affordability to ensure you only borrow what you can comfortably repay without overstretching your finances.
If you’re wondering about the size of mortgage you can afford in the UK, a mortgage affordability calculator is an excellent place to start.
However, it only provides a rough estimate since mortgage providers consider different factors to determine your affordability.
Here’s everything you need to know about how much mortgage you can afford.
What Are Mortgage Affordability Calculators?
Mortgage affordability calculators are online tools you can use to know how much you can afford to borrow based on your financial situation.
Simply fill in various details like your income, monthly expenses, and the desired loan term, and the mortgage affordability calculator will show you estimates of the maximum amount you can afford.
It also allows you to adjust input values to determine how changes in income, expenses, and loan terms can impact your affordability.
A mortgage affordability calculator is valuable since it shows how much you can comfortably afford without overextending yourself.
However, it should only be used as a starting and not a guarantee, since lenders will conduct a more comprehensive assessment before approving your application.
Factors that Influence The Size of Mortgage You Can Afford UK
The Lender
All lenders are different and feature their own affordability criteria when determining the size of mortgage you can afford.
Some use manual processes, while others use automated systems based on your credit score, and you’ll find that you can borrow different amounts depending on the lender you approach.
Lenders have traditionally used income multiples or loan-to-income (LTI) ratios to determine mortgage affordability, where they use information like your net disposable income and monthly expenditure to determine the maximum loan repayments you can afford.
Different lenders can feature different lending caps like 3x, 4x, or 5x your income, so it’s wise to shop around and compare various mortgage providers to ensure you get the best deal.
Credit Score and History
Your credit score can significantly impact mortgage affordability, since it influences the maximum amount a lender is willing to offer and the number of lenders willing to consider your application.
Mainstream lenders can reject you outright if you have low or adverse credit scores, and you may need to approach a specialist lender to get a mortgage.
The severity of your credit issue and when it occurred will impact your mortgage affordability assessment and the lenders willing to consider you.
Income Type
The type of income you have can also affect how much a lender is willing to offer, depending on whether the income is enough and secure to make repayments now and in the foreseeable future.
You may need to jump through a few hoops if you have a complex income type, and not all lenders will consider every penny you earn when assessing mortgage affordability.
Certain income types, like salaries paid in cash, can be deemed unacceptable, while non-standard and variable income types can be considered a higher risk as they’re difficult to predict.
Monthly Expenditure
Lenders will also closely examine your regular monthly expenditures or outgoings to determine the size of mortgage you can afford UK.
Rule changes implemented under the Mortgage Market Review require a more stringent assessment of monthly spending when determining mortgage affordability, and this involves answering detailed questions about your spending habits and lifestyle.
Lenders will look at how much money you spend on all sorts of things, including debt payments, regular bills, insurance, childcare, memberships, clothing, holidays, entertainment, and travel.
Lenders will also want to know if your outgoings are likely to change significantly in the coming years, like if you plan to start a family, to determine how much you can afford to borrow.
Related reading:
- Reasons for remortgaging.
- Remortgaging to release equity.
- Remortgaging to buy another property.
- Remortgaging with bad credit.
- Remortgaging for home improvements.
- I own my house outright can I remortgage?
- Capital raising mortgages.
How to Improve the Size of Mortgage You Can Afford UK
A few steps you can take to improve the size of mortgage you can afford UK include:
Improving Your Credit Score
Your credit score not only affects whether your application is successful, but also influences how much your monthly repayments will be, therefore affecting the size of mortgage you can afford.
Enhancing your score is one of the most effective things you can do when preparing for your mortgage application.
Request a credit report and ensure all the information is correct and up-to-date.
You can also repay old debts, close unused bank or credit card accounts, reduce your use of credit, and repay your bills on time to improve your score.
Reduce Your Spending
Lenders will look at your monthly spending habits to determine whether you manage your money well or you’re living beyond your means.
Regular monthly outgoings towards certain things like high-risk or unnecessary items and gambling can impact your ability to repay and make you an unappealing mortgage applicant, reducing how much you can afford to borrow.
Prove You Can Manage Debt
Repaying your debts in full every month and paying off any outstanding debts can show you’re a reliable borrower while also improving your credit score.
Lenders will view you more positively when you don’t have any other significant financial commitment, and you’ll have more disposable income that will make it possible to afford a larger-sized mortgage.
Increase Your Deposit
Although the deposit size doesn’t affect affordability models, it can impact your borrowing potential or what house you can afford to buy.
The deposit will affect the loan-to-value (LTV) ratio, which is the amount you’re borrowing compared to the overall cost of the loan.
The lower the LTV, the lower the risk to the lender, making you a more attractive borrower.
However, a higher LTV can make it challenging to borrow the amount you want, resulting in higher rates and fees that limit how much mortgage you can afford.
How Much Mortgage Can I Afford? Final Thoughts
Ensure you only borrow the size of mortgage you can afford comfortably without struggling, instead of borrowing the maximum amount your income can allow and straining your finances.
You can use a mortgage affordability calculator to get a rough idea of how much you can afford, or consult an independent mortgage advisor or broker with whole-market access to gain a better understanding of your situation and options.
Call us today on 01925 906 210 or contact us to speak to one of our friendly advisors.
