How Much Mortgage Can I Afford?
Working out how much mortgage you can afford to pay each month is vital when you’re buying a property. Mortgage lenders will consider the size of your deposit, your income, your outgoings and any other factors such as debt that could affect how you pay back your mortgage.
It's important you are sure you can afford to pay your monthly mortgage payments along with other regular bills such as utilities, broadband and council tax.
Compare My Move have put together this detailed guide to help you work out how much mortgage you can afford when buying a house.
How Lenders Assess What You Can Afford
In 2014, the Financial Conduct Authority (FCA) introduced a role that capped the loan-to-income ratio at 4.5.
This means the largest amount most people can borrow as a mortgage is 4.5 times their annual income. It’s important to note that this is the maximum you can borrow – many people will only be eligible for much smaller loans, especially if they are on a lower salary or looking to get a mortgage on a zero-hour contract.
Rules introduced in 2014 also required lenders to carry out an affordability assessment before deciding how much to lend each applicant.
During a mortgage interview with a lender, the affordability assessment looks in depth at your income and your outgoings. It is used alongside your credit score and the size of your deposit to make a decision about how much you can borrow. It is at this time that the lender can advise you on what credit score you need to buy a house.
The aim of these rules is to ensure all borrowers can afford their monthly mortgage payments.
What the Lender Takes into Account
During an affordability assessment your mortgage lender will look at how much you earn before tax and any other income you receive. They will also review your outgoings and spending patterns.
Your income might include:
- Your salary from your job
- Any income from a second job
- Any benefits you receive
- Pension income
- Child maintenance payments
- Spousal support from an ex-partner
The lender will want to see evidence of your income – payslips or your P60, for example.
When determining how much mortgage you can afford, your mortgage lender will also look at your outgoings. Many lenders will look at future scenarios that could affect how you pay your mortgage back such as if you were to have a child or lose your job.
Your outgoings might include:
- Utility bills (gas, electricity, water)
- Telecoms bills (broadband, mobile phone)
- Debt repayments
- Childcare bills
- Regular travel expenses (i.e. if you commute to work)
- Any child maintenance payments to an ex-partner
- Car expenses (i.e. insurance, servicing)
- Insurance (e.g. home, health)
The lender will normally ask to see six months’ worth of bank statements as evidence of your outgoings.
You can prepare for this by cutting out unnecessary spending for those six months – this means reducing how much you spend on pubs, restaurants, holidays etc. Ideally you’ll stay in the black each month, and not use your overdraft,
If you’re making a joint mortgage application with someone else, the lender will assess your finances together.
How Much Can I Borrow?
In general, the bigger the deposit you can save, the more choice of mortgage products you will have and the cheaper your mortgage rate will be.
How much of the property’s value you borrow is known as the loan-to-value (LTV).
For example, if you have a 20% deposit and need to borrow 80% of the property’s value as a mortgage, your LTV will be 80%. The lower the LTV, the cheaper mortgages become. This is because lower LTV mortgages represent a lower risk to the lender.
You’ll normally need at least a 5% deposit to buy a property (e.g. 95% LTV). You’ll get a much wider choice of deals if you can save 10% (90% LTV), and even more choice if you save 20% (80% LTV), or 30% (70% LTV).
When mortgage lenders advertise mortgage products, it will state the maximum LTV allowed.
If you have significant debt, you might not qualify for a mortgage, or the lender will loan you very little. It’s important to be wary of your outgoings prior to applying for a mortgage, as this could negatively affect how much you can borrow.
Will I Be Able to Cover the Mortgage Payments?
While your lender will assess your mortgage affordability during your mortgage application, it’s a good idea to think about whether you are comfortable with your mortgage payments too.
Will you be paying much more than you currently pay as rent? Can you afford the bills on your new home? It’s important to bear in mind that if you previously lived in a house share and split the bills with several housemates, paying them alone will work out much more expensive.
Will you have enough money for repairs and maintenance to your home? Have you got enough savings in case you lose your job? Will you still be able to afford things you enjoy, such as nights out and holidays, when you have a mortgage?
How Much are Mortgage Fees?
When you take out a mortgage, it is not just the interest rate you need to think about, but mortgage fees too.
Mortgage lenders must highlight all fees that are included in the mortgage as part of the annual interest calculation. This is known as the Annual Percentage Rate of Charge or APRC. Mortgage fees are usually listed in a document called the European Standard Information Sheet (ESIS).
The table highlights the most common mortgage fees included when you buy a property:
|Mortgage Fee||What is the Fee?||Cost|
An arrangement fee is paid to your lender for setting up the mortgage. You can choose to add it to your mortgage payments or pay upfront.
A booking fee is charged when you apply for a mortgage. It’s often non-refundable, even if you don’t end up going ahead with the mortgage.
A valuation fee is paid to your lender to carry out a mortgage valuation survey which will value your property. It will reassure them that you can afford what you owe.
£150-£1,500 (although this can sometimes be free, depending on your mortgage lender)
Telegraphic Transfer Fee
A telegraphic transfer fee is what your mortgage lender will charge you for them sending the money to your solicitor.
How Do Mortgage Interest Rates Work?
Your mortgage interest rate will determine how much you will pay per month for your mortgage. There are two main types of mortgage, a fixed-rate mortgage and a variable rate mortgage:
With a fixed-rate mortgage the interest rate on your mortgage, and therefore your monthly payments, will be fixed for a set amount of time, normally two, three or five years.
When the fixed rate ends, you’ll normally be moved to your lender’s standard variable rate (SVR). This will probably be a higher rate and your payments will become more expensive. Most people remortgage to a better deal at this point.
Variable Rate Mortgage
With a variable rate mortgage, the interest rate you pay, and therefore your monthly payments, can potentially go up or down each month.
This might be due to changes to the Bank of England base rate, or your lender’s standard variable rate (SVR).
Can I Afford to Buy a Property?
Whilst your mortgage deposit is normally the biggest upfront cost involved in buying a house, there are other costs you need to consider. You will need to factor in additional fees such as house survey costs, conveyancing costs and removal costs, but there are other services people forget to budget for.
Some costs will have to be paid even if the purchase falls through. A study by MFS found that two fifths (39%) of UK homeowners have had to pay costs to third parties even if they didn’t complete the sale.
Other costs involved:
- Mortgage Lender Fees - You can usually either pay mortgage lender fees upfront or add it to your monthly payments.
- Stamp Duty - Your conveyancer will pay this as part of the conveyancing costs, which you will pay back upon completion. Stamp Duty must be paid after you’ve bought the house. Use our Stamp Duty calculator to work out how much you’ll need to pay.
- Estate Agent Fees - Estate agents will ask for a fee of the final sale price if you’re also selling your house, usually between 0.75% and 3.0% plus VAT.
- Council Tax - This is usually paid monthly to your local council.
- Utility Bills - You may already be paying utility bills, but if you’re moving out of your family home, expect to pay gas, electric, water and broadband bills monthly.
- Maintenance and Repairs - Depending on the condition of the house you buy, you might need to pay for repairs. A property survey will be able to tell you areas of concern. Expect to pay for general maintenance and repairs when needed.
- Home Insurance - Mortgage lenders usually make sure you have home insurance to cover their investment.
Save on Your Move with Compare My Move
Compare My Move will help you at every stage when you’re buying a house. From comparing conveyancers, hiring a chartered surveyor and helping you find a removal company, we’ll be there for you. Compare your move now and save up to 70% on the costs.