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A Comprehensive Guide On Mortgage Affordability

What is meant by mortgage affordability?

When a lender talks about mortgage affordability, they are referring to the maximum amount that the borrower(s) on an application can afford to borrow. This assessment is based on the individual circumstances of the borrower(s) and the mortgage provider’s lending criteria.

How is mortgage affordability calculated?

There are a number of factors that affect the mortgage affordability calculation used by a lender. These include:

  • Your employment status
  • Your age
  • Your income
  • How much debt you have
  • The value and the type of property you intend to purchase
  • The loan to value (LTV) and interest rate
  • The cost of living
  • The type of mortgage finance
  • Any dependents that you have
  • Any long-term commitments (child maintenance / school or nursery fees)
  • Any benefits you are in receipt of
  • Lender stress tests – the lender uses these to ensure you can afford the mortgage if interest rates rise
  • Any rental income – particularly significant for BTL mortgage affordability

Lenders don’t usually reveal exactly how they calculate the maximum you can borrow, and the calculations can vary from lender to lender. Typically, you can borrow around 4.5 to 5.5 times your income after the deduction of any commitments – but this can vary depending on which lender your application is placed with.

How much can I borrow?

The actual amount you can borrow will depend on your personal circumstances, but here’s an example scenario:

One applicant

With 1 dependent child

With a personal loan paying £100 per month

Earning £50,000 per annum as an employee

Purchasing a property valued at: £500,000

With a deposit of: £300,000
Mortgage amount needed: £200,000

Taking the mortgage over 35 years

Not owning any other property

– Could potentially borrow £211,000 if taking a fixed rate less than 5 years, or £250,000 if taking a fixed rate of 5 years or longer.

Of course this is an approximation. All mortgage lenders calculate affordability differently (and have different rules about who they will accept). Seek advice from a professional mortgage adviser. 

Is mortgage affordability different for different types of property loan?

How much you can borrow partly depends on the type of property loan you apply for. 

BTL mortgages

Buy to let mortgages are assessed differently compared to residential mortgages, and they’re based on the rental income a property is expected to achieve. The rent has to meet the lender’s Interest Coverage Ratio which is a stress test to ensure the rent covers around 125% – 140% of the mortgage payment, based on a specific interest reference rate. How much rent you will receive will determine the level of rental coverage, and the amount you can borrow as well as the property value and the loan to value.

Residential mortgages

Residential mortgage affordability is based on a number of factors such as income, current debts, number of financial dependents, the amount of equity and the property itself. Typically most mainstream lenders will allow you to borrow up to 4.5 to 5.5 times your income after the deduction of your annual debt commitments. 

Residential lending criteria is stricter compared to buy-to-let mortgages due to the government mortgage regulation, which was put in place to ensure that lenders leant more responsibly and only to those who could afford to repay the mortgage. Affordability calculations also review the future affordability of mortgage payments if interest rates were to rise by a few percentage points. 

Why use Simple Fast Mortgage to secure your available affordability?

Our team of mortgage experts prides itself on our ability to secure the lending that our clients need. We will take the time to understand your current situation in terms of your income and debts, and we’ll endeavour to find a lender who understands your unique circumstances and is the best fit for you. 

Our mortgage advisors have extensive knowledge of the current mortgage market, the lenders available and their criteria. We use this knowledge to help you decide which lender would be the most advantageous in helping you to achieve your goals. You’ll be guided through the process by our experts who will also liaise with your solicitor, accountant (if applicable) and the lender on your behalf to make your application go seamlessly. Contact us to start your application and receive a personalised affordability assessment.

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