Before you apply for a mortgage, you can consider more than just whether you can afford the monthly payments. Mortgage lenders will examine your income and outgoings to determine if you will be able to make payments if interest rates increase or your circumstances change. Learn more about how lenders determine how much money you can borrow. Read: How much can I borrow for my mortgage based on my income?
- How lenders determine how much you can afford
- What factors the lender considers
- How much money should I borrow?
- Your next move is to
How lenders determine how much you can afford
Mortgage lenders used to base the amount you could borrow primarily on a multiple of your salary.
This is referred to as the loan-to-income ratio.
For example, if your annual income was £50,000, you might have borrowed three to five times that amount, resulting in a mortgage of up to £250,000.
When you apply for a mortgage, the lender will now cap the loan-to-income ratio at four and a half times your annual income.
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Use our Mortgage Calculator to estimate how high your monthly payments will be if interest rates rise in the future.
They must also determine what amount of monthly payments you can handle after taking into account your income and different personal and living expenses.
This is referred to as an affordability assessment.
The Financial Conduct Authority implemented these reforms in 2014 after thoroughly analysing the mortgage industry.
The lender must also consider the future and ‘stress test’ the willingness to repay the loan.
This takes into account the impact of potential interest rate increases as well as changes in your lifestyle, such as:
- Resigning
- raising a child
- taking a career break
If the lender believes you will be unable to make your mortgage payments under these circumstances, they will restrict the amount you may borrow.
- To find out how much you can borrow, use our mortgage affordability calculator.
- To calculate the interest and repayment rate, use our Mortgage Repayment Calculator.
Comparison websites are a good place to start for those looking for a mortgage that is customised to their specific needs.
We suggest the mortgage comparison websites mentioned below:
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Keep in mind:
Comparison websites will not always produce the same results, so use more than one before making a decision.
Before making a purchase or switching suppliers, it’s also a good idea to do some research on the type of product and features you need.
More information can be found in our comparison site guideopens in a new window.
What factors the lender considers
The lender can consider the following factors when determining how much you can afford to borrow:
1. Your earnings
Your basic income income from your pension or savings child care and financial assistance from ex-spouses any other earnings you have, such as overtime, fee or bonus payments, or a second job or freelance work
Pay stubs and bank statements would be needed as proof of income.
If you are self-employed, you must provide:
Bank statements, corporate reports, and details about the income tax you’ve charged
2. Your Expenses
Repayments on credit cards
Maintenance payments insurance – construction, contents, travel, pet, life, and so on all other loans or credit agreements bills such as water, gas, electricity, internet, and broadband
The lender can request estimates of your living expenses, such as clothing, basic recreation, and childcare.
They can also request recent bank statements to back up the statistics you provide.
3. Potential future changes that could have an effect
The lender will determine if you will be able to pay your mortgage if you:
Interest rates have risen.
You or your wife lost your job; you were unable to work due to illness; or your life changed, such as raising a baby or taking a career break.
It’s also important that you prepare ahead of time to figure out how you’ll make your payments.
For example, you can help to protect yourself against unforeseen income declines by saving whenever possible.
Make sure it has enough money to cover three months’ worth of expenses, including the mortgage payments.
How much money should I borrow?
Based on your income and outgoings, our mortgage affordability calculator will show you how much a lender would give you and if you’d be able to afford the monthly payments.
You can also use our Mortgage calculator to determine how high your monthly payments will be if interest rates rise in the future.
You may also prepare for interest rate increases by remortgaging or overpaying. Read more articles: Finance Guide
