All You Need To Know About Mortgage Affordability

Working out how much you can borrow is vital when buying a new home. Here’s how to go about it – and how to boost your chances of getting a bigger mortgage.

Multiple interest rate rises since the end of 2021 have made mortgages much more expensive, so it’s more important than ever to check that you’ll be able to afford the home you’ve set your heart on.

What is mortgage affordability?

An affordable mortgage is one that you’re comfortably able to repay every month, alongside all other outgoings. After carrying out a thorough assessment, a lender will only offer a mortgage that you can afford. Although the process can seem over-cautious, it reduces the likelihood of missed payments (which would affect your credit rating) and the worst-case scenario of repossession should your financial circumstances change for the worse.

Affordability assessment

When calculating how much you can borrow, lenders examine your gross income and monthly expenses. Income multiples are used to determine the maximum size of the mortgage. “For first-time buyers, this is generally 4 - 4.5 times their income. They can typically borrow up to 95% of the property's value with a mortgage, subject to affordability checks and creditworthiness assessment by the lender,” said Rupi Hunjan, managing director at Censeo Financial. “The exact amount that a first-time buyer can borrow depends on various factors including their income, employment status, deposit size, credit history and the lender's policies.”

High earners and some professionals may be able to borrow more. “A number of lenders offer 5.5 times earnings to those with incomes over £60,000,” explained Richard Dana, CEO at Tembo. “Key workers such as nurses or teachers can benefit from multiples up to 5.5x, whilst certain qualified professionals like doctors, lawyers or engineers can benefit from up to 6x income multiples. The idea is that with more stable jobs, there is less risk to the lender that they will be unable to repay the loan each month.”

Earnings from employment and self-employment, child benefit, working tax credit, pensions and rent from a buy-to-let property are all regarded as income. Bonuses, commission and overtime are taken into account, though as these fluctuate the lender might only use a percentage in its calculations. Outgoings include utility bills, council tax, student and other loans, childcare, credit card payments, food, transport and lifestyle expenses such as regular holidays, eating out and gym memberships. Your credit history will be evaluated too.

Lenders used to conduct a stress test to consider how applicants could cope with increased mortgage repayments at 3% above their standard variable rate. Amidst rising interest rates this would have prevented many first-time buyers from getting the mortgage they required to buy – even when showing they were able to pay a similar amount in rent. The test was shelved in August 2022 but some lenders carry out their own version to minimise risk.

What affects affordability?

A poor credit history demonstrating difficulties with past loan repayments is a red flag to lenders looking for responsible borrowers. This can lead to an application being rejected or a higher mortgage interest rate. And getting the desired mortgage offer isn’t always plain sailing for the self-employed. You must submit at least two years of tax returns and might be required to provide an income projection from your accountant.

“As a business owner or shareholder, you will be looking to reduce or mitigate your tax liability, but lenders’ main measure for determining affordability is company net profit,” said James Keable, mortgage services director at Capital Private Finance. “This can be eased by some lenders using net profit in combination with dividends and even retained profit, but these are unlikely to fully bridge the gap. Since the pandemic, there have been even more hoops to jump through and expert advice has been even more important. With self-employed income being evidenced in different formats, it can sometimes be complex to evaluate for mortgage purposes, but an experienced broker will be able to use these figures to find the most effective way of presenting to a lender to increase affordability.”

Affordability boosters

If you’re unable to borrow as much as you’d like, you can take steps to increase affordability. Start by checking your credit report and ask the credit reference agency to amend any errors. Ensuring you’re on the electoral roll immediately improves your credit score, as does utilizing less than 30% of your available credit and generally cutting spending and debts. However, joining forces with another person makes the biggest difference.

“There are a growing number of joint borrower, sole proprietor “Income Boost” mortgages whereby a family member allocates some income to the mortgage to temporarily increase affordability whilst the buyer establishes themselves on the property ladder,’ said Richard Dana. “The ‘booster’ is not an owner of the property, but they do share some of the risk associated with the mortgage. Income Boost mortgage can be used for a variety of different types of customers including those who are paying rent each month but can’t quite meet affordability on monthly mortgage repayments. They are also really useful for people separating and wanting to buy out an ex-partner.”

It’s also worth looking into government-backed schemes like Shared Ownership and First Homes, and developer incentives such as Deposit Match, all designed to reduce the amount purchasers need to borrow.