How much can I afford to borrow?
Posted on 1st June 2023 at 16:56
How much can I afford to borrow?
One of the most common questions we get asked is “How much can I afford to borrow?”. The answer helps people to establish what sort of purchase they can make and narrow their property search down. Many years ago before the 2008 market crash the was a simple rule that you could borrow 4x your earnings. That was it, as simple as that. They never took into account any outgoings or credit commitments you had. Since the crash and introduction of tighter regulations and consumer duty affordability calculations are much more complex now.
Now, lenders take many more factors into account when they calculate how much they are willing to lend you. This to make sure that you can comfortably afford the mortgage you apply for in good times and bad. They will calculate if you can afford the mortgage in the future if interest rates were to increase and your payments increase. We will now look at each factor in detail to help you better understand what lenders look for and how you can strengthen your position when applying for your next mortgage.
Income and outgoings
Your personal income is the most important factor lenders will look at. If you are applying for a joint mortgage both of your incomes will be used. Depending on your level of income lenders will multiply this by a certain figure. Most lenders will multiply your income by 4.5x as a base line. If your income is over £75,000 per year (sole or joint) some lenders will multiply your income by 4.75%, and if you earn over £100,000 per year some lenders will multiply this by 5x. So the more you earn the further lenders will stretch your income.
Lenders will also take into consideration your committed outgoings, committed outgoings are the monthly payments you must make each month. These include things such as:
• Council tax
• Child care cost
• Insurance payments
They will also complete a credit check on you to see what other outstanding debts you have such as credit cards, loans and car finance etc. They do this because every £1 you spend on committed expenses like we have covered is £1 you cannot commit to your mortgage. If you earn £2,000 per month net income, but spend £1,500 per month on committed outgoings lenders will see that you only have £500 left over each month to commit to servicing a mortgage.
Until Skipton building society released the first 100% mortgage in over 15 years, all purchases required a minimum deposit of 5% of the purchase price. With deposit being the biggest barrier to buying your first home for most people in the UK, the deposit is a very important piece of the puzzle. Although you may be able to borrow £200,000 for example based on the lender’s affordability assessment. If you do not have a deposit to put down, you cannot proceed with the purchase.
If you do have a deposit, then there may be a limit on your purchase price. Everybody will have a maximum mortgage amount deemed affordable by lender, so if you want to buy a property worth more than that figure you will need to make up the difference with your deposit. For example, the maximum lenders can offer you is a mortgage of £190,000 and you see a property for £205,000. Rather than using the minimum 5% (£10,000) deposit for this purchase you would need to increase this to £15,000 to add the additional £5,000 needed.
Certain property types and schemes require a minimum deposit too, so if you do not have that deposit then you wouldn’t be able to proceed there either. For example some lenders cap lending to 85% for new build properties, so without 15% you cannot use that lender.
Although ‘on paper’ you can afford to borrow a particular figure, if that mortgage equates to a very high monthly payment that you do not feel is comfortable then this will limit the amount you want to borrow. Lenders may even make this decision for you if you are limited to a particular term length due to your age, the lender may decide that over that particular time frame lending that particular amount is not affordable. This will be because the short term would dramatically increase the monthly payments to a level that you would not have the surplus income each month to cover this.
You may have a strict budget because you want to live a balanced life. Some people are happy to sacrifice a lot in life in order to secure the home of your dreams. Some people are happy to sacrifice a level of home to have an active social life or other commitments. So, if the mortgage payments on a property price don’t fit your budget you may need to reduce your target purchase price, by working backwards from the monthly payments.
Typically, the longer you stretch your term the more of the calculated figure you can borrow. This is because the longer the term the longer you have to pay off the mortgage but the smaller your monthly payemnts will be. Although you may feel a particular monthly payment is within your budget the lender may reduce the amount, they will lend to you if you wish to cut the term length too short in their eyes. So, to maximise the amount you can borrow you may need to extend your term slightly to make those monthly payments more comfortable. Remember you can always overpay on your mortgage over time to shorten the term that way.
For more information, please contact us directly on 01482 205084 or email@example.com
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