How do I calculate how much mortgage I can afford to borrow?
Before 2014, mortgage lenders would typically calculate mortgage affordability by looking at your income. In most cases, you’d have been able to borrow between three and five times your annual income.
For example, if your annual income was £45,000, you might have been able to borrow five times that amount – giving you a potential mortgage of up to £225,000.
But in 2014, the now Financial Conduct Authority or FCA (previously known as the Financial Services Authority) published the Mortgage Market Review, which introduced a number of changes to how mortgage affordability is determined.
The most notable change was that mortgage lenders could no longer base their decision solely on the borrower’s income.
How to calculate mortgage affordability
The process of determining affordability now covers the following elements:
1) Your income
Not only does this cover your basic salary, it must also include any income you receive from investments, pensions, or financial support. You’ll need to provide evidence of your income in the form of payslips or accounts, all supported by bank statements.
2) Your outgoings
Your mortgage payments tend to be the largest monthly outgoing, but a lender must also be aware of other outgoings you’re committed to.
This could include credit card repayments, any insurance direct debits, your monthly bills, and other loans you may have.
You might also be asked for estimates relating to your monthly living costs, but this is at the discretion of the lender.
3) A ‘stress test’
This relates to future changes that may impact your ability to afford your monthly mortgage payments. Scenarios the lender might consider are:
- If you or your partner lost their job
- If you decided to have children or more children
- If you or your partner could not work due to illness
- If interest rates increased or decreased
They do this by taking into account your current lifestyle, along with your income and outgoings, and calculating the possible financial impact of any of these changes.
What if you’re self-employed?
If you’re self-employed, you can often still get a mortgage, though most mortgage lenders will be more cautious than if they were lending to someone working as a full-time employee.
A deposit of at least 5% of the value of the property, a strong credit history, and a track record of a minimum one year (preferably two) of regular work, should help ease any concerns of a mortgage lender.
Find out more about getting a mortgage when you’re self-employed.