A common frustration for would-be homebuyers today is that they are trapped paying rent of more than £2,000 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 to be just an irritating paradox, it comes down to the way that mortgage affordability is calculated. If you understand this calculation, you’re better placed to decide what you can do to improve your chances of mortgage approval.
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. To do this, they undertake a mortgage affordability assessment, which considers your income, debts, and spending.
The consequences of taking on a mortgage that 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 that’s equivalent to what you currently pay your landlord.
Mortgage affordability is primarily based on your income and outgoings, but other factors can have an indirect impact on the amount you can potentially borrow.
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How much can you borrow?
Lenders are free to 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, though, most applicants will be able to borrow up to 4-4.5 times their annual income. If you’re a strong applicant and you’re prepared to search extensively to find the right lender, you might be able to borrow 5 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.
|Annual income||Income x 4||Income x 4.5||Income x 5|
How much could you borrow as a joint applicant?
If you’re buying a home with another person, the affordability assessment will often be based on your combined total 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.
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Mortgage affordability calculator
You can see how this may work out for you by inputting your own annual income into our calculator below.
Mortgage Affordability Calculator
Our affordability calculator can tell you how much you can potentially borrow from a mortgage lender. Simply enter your total household income below and our calculator will do the rest.
You could borrow up to
Most lenders would consider letting you borrow
This is based on 4.5 times your household income, the standard calculation used by the majority of mortgage providers. To borrow more than this, you will need to use a mortgage broker to access specialist lenders.
Some lenders would consider letting you borrow
This is based on 5 times your household income, a salary multiple you might struggle to qualify for without the help of a broker. This income multiple is not widely available to customers who are applying directly with a lender.
A minority of lenders would consider letting you borrow
This is based on 6 times your household income, a salary multiple you will struggle to get without a broker. Six-times salary mortgages are usually only available under very specific circumstances.
Get Started with an expert broker to find out exactly how much you could borrow.
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:
A broker will be able to look at your income, debts, and spending to advise you on how these will be assessed by various lenders. 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.
If you speak to a broker with whole-of-market access, they’ll be able to find every mortgage that’s currently available 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.
A broker can give you tips on how to push the limit of mortgage affordability. For example, you may receive money in forms that 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 who we work with to contact you directly for a free, no obligation chat.
Factors directly affecting mortgage affordability
While the largest factor in the mortgage affordability assessment is usually your income, there are several other significant factors you should be aware of.
If you are currently paying off a large amount of 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.
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 have an indirect effect on 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 that you can approach lenders who offer mortgages based on more than the typical 4.5 times salary.
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).
If you have experienced serious issues such as bankruptcy or county court judgements, not all lenders will consider your application. You might want to speak to a bad credit mortgage expert to find out more about your options.
Head over to our credit reports hub to find out how to check your credit history for free.
The maximum income multiple that a lender offers 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 of it 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.
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 first-time buyers might be buying with a small deposit, while other people already have some equity in their current home that they can put towards a new property.
Certain lenders will offer a higher income multiple mortgages to buyers in a specific list of professions (such as doctors, lawyers, and accountants). Typically, these buyers will also need to be in a particular age range (such as 25-40 years old).
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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.
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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). If you wish to do this, you will need to pass the new lender’s affordability assessment.
Due to the current cost of living crisis, this has recently become more difficult. Mortgage rates are rising, while average incomes are not rising at the same rate. You might find you’re unable to 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 find yourself in this situation, you should speak to a broker about all of your options.
Finding a broker to help with your own financial situation
The key to finding the best deal for you is often first 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 who has been trained and vetted by us. It’s free to set up a no-obligation chat so you can find out more. To give it a try, call us on 0808 189 2301 or make an online enquiry.
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