A Guide To Mortgage Affordability and How Much You Can Borrow

A common frustration for would-be homebuyers today is that they are trapped paying rent of more than £2,190 a month (the current average in London) because they can’t get approval for a mortgage that would cost far less.

While this may seem just an irritating paradox, it comes down to how mortgage affordability is calculated. If you understand this calculation, you’re better placed to decide how to improve your chances of mortgage approval.

In this guide, we’ll cover what we mean by mortgage affordability, how to find out how much you can borrow, and how a mortgage broker can increase your chances of approval. For all our articles on this topic, visit our mortgage affordability hub page.

What do we mean by mortgage affordability?

Mortgage lenders are required by the Financial Conduct Authority (FCA) to assess whether applicants can afford to repay the loan they wish to take out. They undertake a mortgage affordability assessment, considering your income, debts, and spending.

The consequences of taking on a mortgage you can’t afford can be very serious, including losing your home and causing damage to your financial situation and credit record that’s difficult to repair.

It’s because of these consequences that the affordability assessment is so rigorous. Falling behind on mortgage repayments is far riskier than falling behind on your rent, which is why a mortgage lender might be reluctant to approve a monthly repayment schedule equivalent to what you currently pay your landlord.

Mortgage affordability is primarily based on your income and outgoings, but other factors can indirectly impact the amount you can borrow.

How much can you borrow?

Lenders can assess affordability however they wish, as long as it’s deemed fair to consumers. So, each one has a slightly different process. You’ll likely find that some lenders are prepared to offer you more than others.

As a rule of thumb, most applicants can borrow up to 4-4.5 times their annual income. If you’re a strong applicant and are prepared to search extensively to find the right lender, you can borrow five times your income. So, if your income is £30,000, you’ll likely be able to borrow £120,000-150,000.

The following table shows some more examples.

How much could you borrow as a joint applicant?

If you’re buying a home with another person, the affordability assessment is often based on your combined annual income. So, if your income is £30,000 and your partner’s income is also £30,000, you’ll likely be able to borrow £240,000-300,000.

Mortgage affordability calculator

You can see how this may work out by inputting your annual income into our calculator below.

How a broker can help secure the lending you need

If you’re concerned about whether you’ll pass the affordability assessment for the mortgage you need, a broker could help you in several ways:

Individual advice

A broker can look at your income, debts, and spending to advise you on how various lenders will assess these. If the amount a lender will agree to give you is less than you need, or if you’ve had a mortgage application declined, the broker can provide insight into why and what you can do about it.

Market knowledge

If you speak to a broker with whole-of-market access, they’ll be able to find every currently available mortgage and compare them on your behalf. If one lender will only offer you four times your income, a broker may be able to find one that will offer you five times.

Practical suggestions

A broker can give you tips on how to push the limit of mortgage affordability. For example, you may receive money in forms you didn’t realise you can report as income on your mortgage application, such as spousal support or disability living allowance.

If you get in touch, we can arrange for a broker we work with to contact you directly for a free, no-obligation chat.

Factors directly affecting mortgage affordability

While income is usually the largest factor in the mortgage affordability assessment, there are several other significant factors you should be aware of.

Debts

If you are currently paying off a large debt, this can reduce the amount a mortgage provider is prepared to lend you. Debts would usually be considered large if the monthly repayments are more than 50% of your monthly income. You may wish to wait until you have paid off some of this debt before applying for a mortgage.

Spending

Likewise, you might find that you can borrow less if you have high monthly outgoings. Lenders will want to see how much you spend on bills, food, household essentials, travel, childcare, clothing, leisure, etc. It’s wise to keep your spending as low as possible for 3-6 months before applying for a mortgage.

Factors indirectly impacting it.

Other eligibility factors can indirectly affect the amount you can borrow by limiting or increasing the number of mortgage lenders and deals you have access to.

For example, having a large deposit and clean credit could mean you can approach lenders who offer mortgages based on more than the typical 4.5 times salary.

Credit history

The better your credit history, the more mortgage lenders and products you will likely have access to. If you have minor issues on your credit report, such as defaults and late payments, you may be offered a lower income multiple (e.g. four times your income).

Not all lenders will consider your application if you have experienced serious issues, such as bankruptcy or county court judgements. You might want to speak to a bad credit mortgage expert to learn more about your options.

Head over to our credit reports hub to find out how to check your credit history for free.

Employment status

A lender’s maximum income multiple doesn’t change according to your employment status. However, if you’re self-employed or get income from sources other than salary, the lender may be cautious about how much they include in their affordability assessment.

For example, self-employed income often fluctuates. If your self-employed income this year is £40,000, but last year it was £20,000, not all lenders will approve you for a mortgage of £160,000 (four times this year’s income). They might use the previous year’s figure or an average of the two.

Loan-to-value

The loan-to-value (LTV) of your mortgage is the percentage of the total price of the property that you will be borrowing. For example, a £180,000 mortgage on a £200,000 property has an LTV of 90%. Some lenders will lend at a higher income multiple for mortgages with a lower LTV (e.g. below 85%).

This means that first-time buyers often have access to fewer lenders and deals since they might buy with a small deposit, while others already have some equity in their current home to put towards a new property.

Profession

Specific lenders will offer higher-income multiple mortgages to buyers in a specific list of professions (such as doctors, lawyers, and accountants). Typically, these buyers must also be in a particular age range (25-40).

What about buy-to-let mortgages?

Affordability for buy-to-let mortgages is assessed slightly differently from standard residential mortgages. You’ll most likely be using rental income to make the monthly repayments rather than employment income, so lenders will base their assessment on this instead.

Plus, buy-to-let mortgages are usually repaid on an interest-only basis (meaning that you will only pay the interest on the loan, with the loan amount due to be repaid in full at the end of the term). Interest-only repayments are lower than capital repayments, which makes it easier to pass the affordability assessment.

Mortgage affordability for second homes

To buy a second home, you’ll need to prove to your lender that you can afford the repayments on both properties without overstretching your finances. Lenders can be more cautious about approving applications for second-home mortgages, so it will help if you can put down a larger deposit.

Affordability when remortgaging

This is still primarily based on income and outgoings. Many people choose to remortgage (i.e. find a new lender who offers a better rate than their current lender) when they reach the end of the introductory period on their mortgage (often after two, three, or five years). To do this, you must pass the new lender’s affordability assessment.

Due to the current cost of living crisis, this has become more difficult. Mortgage rates are rising, while average incomes are not rising at the same rate. You might find you cannot prove you can afford your mortgage now, even though you could when you took it out.

That is leaving some people stuck with a mortgage with a higher rate than they signed up for. If you are in this situation, you should speak to a broker about your options.

Finding a broker to help with your own financial situation

The key to finding the best deal for you is often finding the broker who specialises in the type of mortgage you need. So, whether that’s a high-LTV mortgage, a bad credit mortgage, a buy-to-let mortgage, a second home mortgage, or a self-employed mortgage, you’ll want to speak to an expert in that area.

We offer a broker-matching service that connects you to a specialist trained and vetted by us. It’s free to set up a no-obligation chat to learn more. To try it, call us at 0330 818 7026 or inquire online.