What Are Mortgage Affordability Checks?

Written by Martha Lott Reviewed by Emma Lunn

19th Feb 2020 (Last updated on 12th Feb 2024) 9 minute read

How Much Mortgage Can I Afford?

The loan-to-value (LTV) is how much of the property’s value you can borrow which is capped at 4.5 times your salary. 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 monthly mortgage payments become.

The bigger mortgage deposit you can save, the lower your interest rate will be. You’ll have access to a wider range of mortgage deals and lenders will view your loan as a lower risk as you’ll be borrowing less from them.

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). Since the outbreak of Covid-19, many mortgage lenders only accepted a 15% mortgage deposit for a while, removing their 95% mortgage deals. The budget in March 2021 announced the government will help with the return of 95% mortgages for first-time buyers.

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.

What the Lender Takes into Account

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.

How to Calculate Mortgage Affordability?

Your mortgage lender or mortgage broker will first run some checks into how much you can afford to borrow. Typically called a Mortgage in Principle, the lender will need to know the salary of all applicants to provide you with a rough figure of what to expect to borrow.

Then they will carry out their affordability assessment which will thoroughly check your outgoings and incoming to see if they can accept you for a mortgage. Your lender will require the following:

• Proof of current address in the form of a letter or bill
• I.D such as driving license or passport
• 3-6 months bank statements up until the current date
• 3-6 months payslips up until the recent month
• Proof of deposit such as bank statement, premium bonds, savings account, gifted deposit etc.

What is Mortgage Affordability Criteria?

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

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
• Student loan 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)

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:

Fixed-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. Many people chose this option as it guarantees a lower and stable monthly payment for a fixed period of time.

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, which involves the help of a remortgage solicitor.

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).

If your salary fluctuates each month and some months you might be earning less than normal, it may be best to avoid an SVR mortgage as each month's mortgage payment isn't certain.

Will I Be Able To Cover My Monthly 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. This is a question you need to answer before considering taking out a mortgage.

Remember, it’s not just your monthly mortgage payments you’ll be paying. As mentioned further down in this guide, buying a house will come with monthly bills to factor in, as well as ongoing maintenance costs of owning a home.

If you are left with hardly any paycheck after working out your monthly outgoings, then you should re-consider buying a house at this point in time. You don’t want to be left struggling financially each month.

Questions to consider:

1. Will you be paying much more than you currently pay as rent?
2. Can you afford the bills on your new home?
3. 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.
4. Will you have enough money for repairs and maintenance to your home?
5. Do you have job security?
6. Have you got enough savings in case you lose your job?
7. 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. You should ensure you can afford to pay these fees on top of the other costs of buying a house as many of these will be required upfront.

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:

Can I Afford To Buy a House?

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.

Below we’ve listed the typical costs of buying a house at the average UK house price of £267,000.