Before applying for a mortgage, you need to think about more than just whether you can afford the monthly repayments. Mortgage providers will look at your income and outgoings to see if you can keep up with repayments if interest rates rise or your circumstances change. Learn more about how lenders assess how much you can borrow.
- How lenders assess what you can afford
- What the lender takes into account
- How much can I borrow?
- Your next step
How lenders assess what you can afford
In the past, mortgage lenders based on the amount you could borrow mainly on a multiple of your income.
This is known as the loan-to-income ratio.
For example, if your annual income was £50,000, you might have been able to borrow three to five times this amount, giving you a mortgage of up to £250,000.
Now, when you apply for a mortgage, the lender will cap the loan-to-income ratio at four-and-a-half times your income.
They must also assess what level of monthly payments you can afford, after taking into account various personal and living expenses as well as your income.
This is called an affordability assessment.
These changes were brought into effect by the Financial Conduct Authority in 2014 after fully reviewing the mortgage market.
The lender must also look ahead and ‘stress test’ your ability to repay the mortgage.
This takes into account the effect of possible interest rate rises and possible changes to your lifestyle, such as:
- redundancy
- having a baby, or
- taking a career break.
If the lender thinks you won’t be able to afford your mortgage payments in these circumstances, they might limit how much you can borrow.
- Use our Mortgage affordability calculator to estimate how much you can borrow.
- Use our Mortgage repayment calculator to estimate the interest and repayment amount.
Comparison websites are a good starting point for anyone trying to find a mortgage tailored to their needs.
We recommend the following mortgage comparison websites:
Remember:
- Comparison websites won’t all give you the same results, so make sure you use more than one site before making a decision.
- It’s also important to do some research into the type of product and features you need before making a purchase or changing supplier.
- Find out more in our guide to comparison sites open in a new window.
What the lender takes into account
When working out how much you can afford to borrow, the lender will look at:
1. Your Income
- you’re a basic income
- income from your pension or investments
- income in the form of child maintenance and financial support from ex-spouses
- any other earnings you have – for example, from overtime, commission or bonus payments or a second job or freelance work.
You will need to provide payslips and bank statements as evidence of your income.
If you’re self-employed you’ll need to provide:
- bank statements
- business accounts
- details of the income tax you’ve paid.
2. Outgoings
- credit card repayments
- maintenance payments
- insurance – building, contents, travel, pet, life, etc
- any other loans or credit agreements you might have
- bills such as water, gas, electricity, phone, broadband.
The lender might ask for estimates of your living costs such as spending on clothes, basic recreation and childcare.
They might also ask to see some recent bank statements to back up the figures you supply.
3. Future Changes That Might Make An Impact
The lender will assess whether you’d be able to pay your mortgage if:
- interest rates increased
- you or your partner lost their job
- you couldn’t work because of illness
- your life changed, such as having a baby or a career break.
It’s important that you also think ahead and plan how you’d meet your payments.
For example, you can help to protect yourself against unexpected drops in income by building up savings when you can.
Try to make sure it contains enough for three months’ outgoings, including your mortgage payments.
For a full list of the information, you might need to prepare, read our paperwork checklist.
How Much Can I Borrow?
Our Mortgage affordability calculator will show you how much a lender might offer you, and whether you’d be able to afford the monthly payments based on your income and outgoings.
Also, use our Mortgage calculator, which can help you find out how much your monthly payments would be if interest rates rose in the future.
You can also get ready for interest rate rises by thinking about remortgaging or overpaying.
https://www.moneyadviceservice.org.uk/en/articles/how-much-can-you-afford-to-borrow
