Understanding mortgage affordability is essential for anyone considering buying a home or refinancing their existing property. It plays a critical role in determining how much you can borrow, the types of mortgage products available to you, and the steps you’ll need to take to secure a suitable deal. In this guide, we break down what mortgage affordability is, how it’s calculated, and the factors that lenders take into account when assessing your financial situation.
What is Mortgage Affordability?
Mortgage affordability refers to the amount of money you can reasonably borrow to purchase a property based on your income, outgoings, and financial commitments. Lenders will assess your affordability to ensure that you can maintain repayments not only at the time of application, but also if interest rates rise or your circumstances change.
Affordability checks are a regulatory requirement in the UK following reforms introduced by the Financial Conduct Authority (FCA). These changes aim to ensure that borrowers do not overextend themselves financially, reducing the risk of arrears or repossession in the future.
How is Mortgage Affordability Calculated?
Each mortgage lender uses its own affordability assessment process, but there are standard elements that most consider. Here’s a breakdown of what typically goes into an affordability calculation:
1. Income
Your income is the starting point for any mortgage affordability assessment. This includes:
- Basic salary
- Bonuses or commission (if regular and provable)
- Freelance or self-employment earnings
- Investment income
- Rental income (if applicable)
- Other verifiable income sources such as pensions or benefits
Lenders will usually request documents such as payslips, bank statements, and tax returns (for self-employed applicants) to confirm income levels.
2. Outgoings and Expenses
Monthly and annual outgoings significantly affect how much mortgage you can afford. Areas considered include:
- Utility bills and council tax
- Credit card repayments
- Personal or car loan repayments
- Childcare or school fees
- Subscriptions or membership fees
- Travel and commuting costs
- General living expenses, including food and clothing
Lenders usually assess your bank statements and credit file to verify these expenses. Some may use average regional expenditure statistics if precise figures are not available.
3. Existing Debts and Financial Commitments
Debt-to-income ratio is important in determining mortgage affordability. If a significant portion of your income is already committed to existing credit, personal loans, or hire purchase agreements, your available budget for mortgage repayments may be reduced.
4. Number of Dependants
If you have children or other financial dependants, this may affect your disposable income. Lenders typically consider this when assessing affordability, as it impacts your available funds for mortgage payments.
5. Deposit Amount
The size of your deposit not only affects your Loan to Value (LTV) ratio but also your affordability. A larger deposit may result in more favourable mortgage interest rates, which lowers monthly repayments and enhances your affordability outcome.
6. Credit History
While not a direct factor in calculating income and expenditure, your credit history does influence whether a lender is willing to offer you a mortgage and on what terms. Poor credit may restrict access to certain mortgage products, affecting the amount you can borrow and your repayment options.
Stress Testing: Planning for Interest Rate Increases
As part of affordability checks, lenders conduct a stress test to evaluate whether you could still afford your mortgage if interest rates increase. This is known as a ‘mortgage stress test’ and is designed to ensure that changes in the Bank of England base rate won’t leave borrowers unable to meet their monthly payments.
Lenders typically test your finances against higher interest rates than the current deal you’re applying for, sometimes up to 3% above the product rate. This ensures that your mortgage remains affordable even under adverse conditions.
Loan to Income (LTI) Ratio
One of the headline figures in mortgage affordability is the Loan to Income (LTI) ratio. This is the multiple of your income that a lender is willing to offer. For example, if you earn £40,000 a year and a lender offers up to 4.5 times your income, you could borrow up to £180,000.
While 4.5 is a common benchmark, some lenders may increase this for higher earners or reduce it based on risk factors. FCA rules also limit how many high-LTI mortgages a lender can provide.
Self-Employed Mortgage Affordability
For self-employed applicants, mortgage affordability calculations are based on the average of your income over the past few years. Lenders will usually request:
- SA302 forms or tax calculations from HMRC
- Accounts prepared by a certified accountant
- Bank statements for your business
Some lenders may require two or more years of trading history, although there are options for those with only one year, subject to other qualifying criteria.
Impact of Government Schemes
Various government-backed schemes can influence affordability, particularly for first-time buyers. These include:
- Shared Ownership
- First Homes Scheme
- Lifetime ISA contributions
Some schemes lower the deposit requirement, which can affect the overall mortgage amount needed. However, lenders still assess affordability based on your financial situation to ensure repayments remain manageable.
Understanding Mortgage Offers vs. Affordability
It’s important to distinguish between the amount a lender is willing to offer and what you can realistically afford. Just because a mortgage offer is for a high amount doesn’t necessarily mean it suits your long-term financial wellbeing.
Carefully evaluating your personal budget alongside professional mortgage advice can help identify a mortgage that fits both current and future financial circumstances as closely as possible.
How Affordability Affects Mortgage Types
Your affordability calculation may affect what kind of mortgage products are available to you, such as:
- Fixed-rate mortgages
- Tracker rate mortgages
- Discounted variable rate mortgages
- Offset mortgages
Each product has different repayment structures and interest rate behaviours, which can influence monthly repayments. The right choice depends on your risk tolerance, future plans, and anticipated changes in income or expenditure.
Improving Mortgage Affordability
There are a number of steps you can take to improve your mortgage affordability profile before applying:
- Paying down existing debts
- Avoiding new credit applications in the run-up to applying
- Increasing your income where manageable
- Reducing discretionary spending
- Saving for a larger deposit
- Ensuring your credit report is accurate and up to date
Even small improvements across these areas can positively affect the amount and type of mortgage you’re eligible for.
Online Mortgage Affordability Calculators
There are various online tools that can offer an indicative idea of how much you might be able to borrow. These calculators use generalised information and assumptions, so they don’t replace a full affordability assessment from a mortgage advisor or lender. However, they can serve as a starting point when planning your home purchase or remortgage strategy.
Affordability and Remortgaging
Mortgage affordability isn’t just for first-time buyers. When remortgaging, lenders will still conduct affordability checks to ensure that your new deal is manageable. This is particularly relevant if:
- Your income has changed
- You’ve taken on additional financial commitments
- You’re moving to a longer or shorter mortgage term
- Your property value has gone up or down significantly
Being prepared can help ensure your remortgage process goes as smoothly as possible.
Common Misconceptions about Mortgage Affordability
There are a few myths and misunderstandings around the topic of mortgage affordability:
- Myth: You can always borrow four or five times your salary.
Reality: The amount you can borrow depends on your full financial picture, including outgoings and debts. - Myth: A good credit score means high affordability.
Reality: A strong credit score may help, but affordability assessments are based primarily on income and outgoings. - Myth: If a lender approves you once, you’ll definitely be approved again.
Reality: Each lender’s criteria and your circumstances can change over time.
Affordability for Joint Applications
When applying jointly—for example, with a partner or family member—both applicants’ incomes and outgoings are assessed. This often increases how much you can borrow, but the same affordability principles apply. Both credit histories and existing financial obligations will be taken into account.
Affordability in the Context of Rising Interest Rates
With recent increases in the Bank of England base rate, mortgage affordability is under closer scrutiny. Monthly repayments may be higher than in past years, affecting how much you can borrow. It’s important to consider long-term affordability, especially if you’re planning to take out a variable or tracker mortgage.
Mortgage affordability is a critical part of the home buying and remortgaging process. Understanding what affects it and how lenders assess your financial situation can help you prepare more effectively. With careful planning and clear advice, navigating the mortgage market becomes more achievable and enables you to find a deal that suits your needs as closely as possible.
By evaluating your income, outgoings, credit history, and deposit, you can establish a realistic picture of what you can afford and approach your property search or refinancing journey with greater confidence.