One of the most common questions we get from potential clients is ‘How much can I afford to borrow?’. The accurate answer is difficult to determine as the figure will depend on several factors such as: 
 
• Your income 
• Your type of income – employed or self-employed, permanent, or temporary… 
• Bonuses/overtime and commissions earned. 
• Your credit agreements 
• Committed outgoings such as nursery fees, child maintenance and student loans 
• How many dependants you have 
 
There is a general rule of thumb to establish a ballpark figure of how much you can afford to borrow on a mortgage and this increases with the more income you have. Generally, lenders will multiply your income by 4.49x on incomes up to £75,000 per year or so, 4.75x over £75,000 per year and some lenders will increase this to 5x on incomes of £100,000 per year plus. 
 
So, let’s use the conservative calculation of 4.49x annual income and to make it easy let’s assume a joint household income of £50,000, for 2 applicants with no children. Lenders would multiply their income by 4.49x to offer a maximum mortgage of £224,500. Now the length of term would be down to interest rates and how short the term can be that a lender believes the monthly payments are comfortable. For example, you may feel that £2,000 per month is comfortable as you wish to pay your mortgage off as soon as possible, but the lender may feel that £1,500 is the maximum due to the other costs you must pay that will fit within your monthly net income. *These thresholds are based on sole and joint household income. 
 
That is the most rudimentary method of working out your affordability. To get a more accurate picture of how much you can afford to borrow we must consider any loans, credit cards or ‘buy now pay later’ agreements you may have, as these are committed expenses that must be repaid whether you want to or not. 
 
For credit cards lenders will use 3% of your credit card balance for affordability, for example you have a £500 credit card balance, the lender will use £15 per month for affordability as this is the minimum payment you must make each month. As for personal loans and hire purchase the full monthly payment of the credit agreement rather than the loan balance will be taken into consideration. So, if you have a hire purchase for £300 per month, the lender will take £300 per month into the calculation as this is £300 per month that you cannot use for your mortgage payments. 
 
But what does this mean for the amount you can borrow on your mortgage though? There is no hard and fast rule that says if you spend ‘X’ on personal loans per month that your affordability will drop by ‘Y’. 
To complicate matters further, each lender is different with how far they will stretch income and how much of an impact any personal outgoings will have on your affordability. This is why its always best to use an independent mortgage adviser who can work with all lenders on your behalf to secure the best deal for you. 
 
We had a client who earned £42,000 per year and her only commitment was a £315 per month hire purchase payment. The 7 lenders we spoke to give a variety of maximum loan amounts ranging from £114,000 to £180,000. For the same client, with the same set of circumstances! A £66,000 difference! 
 
Mortgage affordability calculators can be found on most lenders’ websites, and you are free to play around with them to discover how much you can afford to borrow. However, tread with caution! You must firstly be honest about your income and make sure you input the correctly because if you input incorrect figures at the beginning, you will get an incorrect outcome. 
 
If you would like us to calculate your mortgage affordability please get in touch with us today on 01482 205084 or email info@greenandgreen.net 
 
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Tagged as: Mortgages
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