Tembo's Guide To Mortgage Affordability
From the UK's affordability rules, to ways to stretch how much you could borrow, we'll take you through everything you need to know about affordability
What is affordability?
If you are comfortably able to repay mortgage repayments each month beside any other monthly outgoings, that means your mortgage is affordable. Essentially lenders will take a view of affordability within the context of the applicants income, debts, committed expenditure, and lifestyle costs (including socialising, food, going out etc). This is when your mortgage is affordable and you can comfortably pay each month.
Mortgage affordability is important for two reasons:
1) Your credit report will record any missed payments and this will stay on the report for six years. Having something like this on your credit report will reduce your chances of getting any other type of loan in the future
2) There is a risk of repossession if you fall behind on your repayments
It’s worth noting that repossession is unlikely. Lenders have a duty to lend responsibly, so you are protected from taking too much risk through your affordability check. Affordability is assessed at a snapshot in time, and a lot can change. That's why it's important to make sure you are protected.
Income multiples are used by lenders to work out the maximum mortgage that they can offer you.
If you earn, say, £30,000 a year, a lender will most commonly use an income multiplier of 4.5 times earnings to work out a loan size (in this case £135,000). If you are buying with another person, affordability is assessed on both your incomes, giving a larger loan size.
If you have a higher deposit and earn at least £75,000, high street lenders will likely lend 5.5 times your salary.
Smaller building societies, such as Darlington Building Society, can offer mortgages that are 6 times income (if the buyer has a professional career). However this is dependent on credit history and time of employment.
Income and outgoings assessment
After income multiples have been applied to the buyer’s income, the bank or building society will run checks to see if the buyer could afford this loan amount alongside all bills, credit commitments, loans and monthly expenditure.
Lenders typically tend to accept the following types of income:
- Basic employed
- Self employed
- Child benefits and working tax credit
- Rent from a buy-to-let property
If you earn commission, or have overtime or bonuses, this could be used to increase your affordability. However because your income may fluctuate month on month, lenders may restrict the percentage of that income you can use. .
Common outgoings that need to be calculated:
- Council tax
- Phone contracts
- Existing mortgage payments
- Student loan
- Transport costs
- School fees
- Car finance
Whilst there’s been a recent flurry of rumours surrounding buy now buy later and whether it will affect buyer’s mortgage applications, prospective homeowners shouldn’t panic! Whilst a recent change to affordability checks now includes buy now pay later schemes as part of credit commitments, this isn’t the end of the world. A lot of the time, buy now pay later loans tend to be for a small amount. So, as long as you plan to have paid off the loan before you move into your new property, lenders won't take it into account as part of your outgoings.
A lender stress test checks whether the buyer could keep up mortgage repayments if interest rates rose by 3%. After the affordability assessment (looking at income and outgoings) the leftover money you have from income must be enough to cover any mortgage repayments that have a 3% higher interest rate than the standard variable rate of the lender.
As the average standard variable rate currently stands at 4.41%, this would mean the buyer would have to be able to afford a rate of 7.41% for the lender to approve them. This means that there is lots of room in the buyer’s budget should rates rise. If you fix to a longer term (i.e 5 years), some lenders don't stress test to such a high level, as the longer term is seen to reduce the risk for the buyer.
If your income isn’t quite enough for the mortgage amount you want, try an Income Boost. Otherwise known as a joint borrower sole proprietor mortgage, an Income Boost is a way of increasing the amount you are eligible to afford by adding a family member or friend’s income to the mortgage application. They are not added to the title deeds so you remain the sole owner.
Interested in stretching your affordability?
Talk to one of our team. They're experts in getting first time buyers onto the ladder.