How Much Mortgage Can I Get? Mortgage Affordability Explained.

Within the mortgage brokering and lending industry, we talk a lot about affordability, but what does it actually mean to you and how can it affect your borrowing and how much mortgage you can get?

What is affordability?

Affordability is a calculation conducted by mortgage lenders to determine how much money you can borrow to put towards your property purchase. You will, of course, need a cash deposit to add to this mortgage amount to determine the price range of a property that you may be able to purchase and ultimately can afford. 

Affordability calculations have multiple elements to factor in and they all need to be considered to find the best outcome and the most suitable lender for your circumstances. We will discuss here a number of the factors that lenders, and therefore your broker, will have to consider to work out your affordability and potential mortgage borrowing. 

Nine things to consider which may affect your affordability and how much mortgage you can get.

1. Your Income

On a fundamental level, the standard calculation which we use to assess mortgage affordability is multiplying your income by 4.49. This is a starting point and the result offered to you by a mortgage lender can be significantly different when they start factoring in your living expenses and other personal outgoings. 

2. Organise your finances before finding the home of your dreams

It is so important to address your affordability (your monthly  outgoings and commitments) before finding the home of your dreams or looking at refinancing because being able to pay your mortgage is a serious matter and comes with some profound consequences if you are unable to. It is these circumstances that lenders do not want to see any of their customers in and will be thorough in exploring your situation before providing any finance to you. It is here where a broker will be able to apply their knowledge and expertise in going through this for you prior to any applications being submitted. 

3. Your monthly outgoings

The mortgage affordability calculations usually start with general information about yourself, like your age and how long you wish to have the mortgage for, known as the ‘term’ among others. Many of the other factors are, but are not limited to, your income, general monthly household outgoings (utilities, food, insurances) and costs that are more personal, commitments such as loans, credit cards or hire purchases. All of these can influence how much you can borrow as well as the Loan to Value (LTV), this is the percentage of your property purchase price that you can provide as a deposit and how much you would like as a mortgage.

4. PAYE, self-employed or Limited Company?

Income needs to be considered in multiple ways. Not only will the amount you earn have a part to play but the way you are paid too. Whether employed PAYE, Self Employed sole trader, Ltd Co Directors or set up as an LLP Partnership, your income can be considered but is treated and looked at differently by each lender. If you are paid a salary, then there may be parts of your salary that need to be considered in your calculation. For example, contributions to a pension, depending on the lender, may need to be factored in separately while others assume that most people contribute to one and so factor them in more universally within their calculators. 

If you are self-employed…

If you are self-employed, then you will need to be able to supply more information to your advisor, usually a minimum of 2 years accounts, but this does not mean those with less cannot get a mortgage. As self-employed paperwork (SA302s, tax calculation and tax year overviews) is more historic than last month’s payslip, lenders like to see a longer history and often use an average of your income over their chosen period to put into the affordability calculation. A wide range of situations and types of income can be used though and it is important to tell your broker so they can look at the lenders who best serve your type of income and circumstance. 

Remember mortgage lenders all have unique selling points and can offer mortgages to some people that others may not be able to help. Net profit, salaries and dividend income all come under the umbrella of self-employed income so do not fret or think that your situation is too complicated. 

5. What about additional income?

In some circumstances additional incomes can be used to supplement your main income. Your affordability may be helped by things such as second jobs, Universal credit, Child Benefit or rental income. What will need to happen is that they are seen consistently on a payslip for the likes of overtime, bonuses and allowances but for Universal Credit or Carers Allowance it may be able to be taken straight away with the right awards letter. 

6. Credit cards, store cards and hire purchase – how these can affect the mortgage you can get

Your personal commitments can have a major impact on what you can borrow. It is sometimes the result of small purchases on a store card, or a balance left on a credit card that will scupper the possibility of getting that desired loan amount from a lender. Often people forget about a few small things that because they just pay a monthly direct debit, they forget that there is a balance sat on that account, these balances can impact your borrowing affordability. Credit card commitments, for the most part with lenders are considered as a balance rather than what you pay off each month, while loans or hire purchases are often factored in by your monthly payment amount. Therefore, someone with a large hire purchase balance may be impacted less due to a smaller monthly payment, as opposed to a borrower with a larger credit card balance which is outstanding each month. 

7. Childcare costs, students loans and more

Each situation is different, and it is important to be able to provide your broker with a full list of what commitments are outstanding so they have the necessary discussions about the impact of this and how you may be able to improve your affordability. Financial commitments that will need to be included can range from credit cards, hire purchase and loans, including student loans, to subscriptions, childcare costs and maintenance payments. This list is by no means extensive but should give you an idea of the depth lenders will assess your application. 

8. Loan to Value explained

Loan to Value is essentially how much of the property value or purchase price you can contribute as a deposit, balanced against the percentage you want to borrow as a mortgage. It drives a small part of the mortgage lender’s decision to lend to you. The more deposit you have as a percentage of the property purchase price for example, the higher loan amount you may be eligible for, from a lender’s calculator. The lender is often able to assess a lower LTV as a potentially lower-risk case, which can provide an opportunity for a higher amount of borrowing as the affordability calculators can be more generous in these situations. 

9. Does your profession affect your affordability and borrowing?

While 4.49 x your income is seen as the general figure to work from and in most circumstances will be the maximum a lender can offer, there are a variety of special lending schemes, underlined by a mortgage that can offer additional amounts to be borrowed. Some are based on the type of job you have for Professionals (such as Doctors, Architects and Solicitors), or First Time Buyers are sometimes offered specific products and higher lending amounts subject to earned income. That is why it is important to discuss all matters with your broker and as early as possible in the process. Once the details have been discussed in your Fact Find with your broker, they will be able to use calculators with lenders to see who best suits your circumstances. They will have to factor in all those matters here, among others, along with their knowledge and experience of lenders criteria and those unique selling points to find you the best mortgage deal.