First time buyer guide
Affordability: How Much Can I Borrow?
What’s an Affordability Assessment?
Since mortgages are risky for both you and your lender, they’ll want to ensure you can repay them for the duration of the term. In the past, mortgage providers calculated the amount you could borrow based mainly on your income. The amount they lent you was usually between three and five times your salary.
Now, most lenders cap this figure at between 4 and 4.5 times your salary – with a few willing to stretch to 5 times your salary if you qualify. But they must carry out an ‘affordability assessment’ before they make you a mortgage offer. That is, they must take a good look at your expenses as well as your income.
How Do Affordability Assessments Work?
In order to work out how much you can borrow lenders will examine:
You will need to provide evidence of your income. The lender will want to see your payslips, P60 and/or bank statements for income from:
- Basic salary
- Money from investments or pension
- Child support and family support
- Income from other sources such as second jobs, etc.
- Bonuses – not all lenders will take these into account but it’s worth checking
If you’re self employed, lenders will assess you in the same way but, since you won’t be able to provide them with any payslips, the process will be more demanding. You’ll usually be asked to prove your income with:
- A copy of your tax returns (typically 2 to 3 years worth, although some specialist lenders will accept 1 year)
- A copy of your business accounts, certified by a chartered accountant
- Bank statements
The lender will want to see evidence of your expenses too. These could include:
- Credit card repayments
- Bank loans
- Student loans
- Bills (electricity, water, phone…)
- Life expenses (clothes, childcare, travel, pets, gym memberships…)
You may also be asked to provide general estimates of your living costs and recent bank statements to back these up.
Any potential unexpected changes in the future
The lender will want to ‘stress test’ whether you would still be able to pay for your mortgage if your circumstances changed. They’ll take into account the effect of possible changes to your lifestyle, such as:
- Being made redundant
- Having a baby
- Taking a break in your career
- Falling ill
- Interest rates rising
Your credit history
Lenders will analyse your credit history to determine how reliably you have kept up repayments on any of your accounts in the past. They’ll find this information in your credit report.
How Can I Improve My Affordability?
Most lenders will look at your proof of income and bank statements for the last 6 months before your mortgage application. Consider taking these steps ahead of time to keep your affordability in shape:
- Pay off your debts: try to clear as much debt from credit cards or personal loans as you can.
- Reduce your spending: this shows lenders that you’re financially responsible and will also save you money.
- Review your finances and lifestyle: see if you can reduce some of your regular expenses such as subscriptions, memberships or insurance. By considering this in the months before you apply for a mortgage you can prove you’re good at managing cash.
- Make a budget: this will help you manage your money better.
- Check your credit report: it’s a good idea to check your credit report regularly and ensure you correct any errors in it before they become a problem.
Affordability checks are now more demanding than they used to be. Remember that, as well as being able to afford to buy the house, you also have to be able to afford to actually live in it. Taking the time to analyse your income and expenses, and enlisting the help of a mortgage broker, could really work in your favour when the time comes to apply for a mortgage.