Mortgage affordability is about whether you can comfortably manage the cost of a mortgage.
Your income is important. However, lenders also look at your spending, debts and other financial commitments.
Therefore, affordability is not simply about how much you earn.
Two people with the same income can have very different mortgage options.
What Is Mortgage Affordability?
Mortgage affordability looks at whether you have enough money to make your mortgage payments.
A lender will usually compare your income with your regular financial commitments.
For example, it may consider your:
- income
- loans
- credit cards
- car finance
- childcare costs
- other mortgages
- regular spending
The lender then decides whether the mortgage appears affordable.
Why Do Lenders Check Affordability?
A mortgage can last for many years.
Therefore, the lender needs to consider whether you are likely to manage the payments.
It does not simply look at whether you can afford the first payment.
Instead, it considers your wider finances.
The lender will also carry out other checks before deciding whether to offer you a mortgage.
Is Affordability Based on Your Salary?
Your salary is an important starting point.
However, it is only one part of the assessment.
For example, imagine two people both earn:
£40,000 a year
The first person has no loans and few financial commitments.
The second person pays:
Car finance: £350 per month
Personal loan: £250 per month
Credit cards: £150 per month
The second person already has £750 of monthly debt payments.
Therefore, the two people may have different mortgage options despite earning the same amount.
What Income Can a Lender Consider?
A lender may consider several types of income.
These can include:
- salary
- overtime
- bonuses
- commission
- self-employed income
- pension income
- certain benefits
- rental income
- other regular income
However, lenders have different rules.
For example, one lender may accept all of your regular overtime. Another may only use part of it.
Therefore, the income used for a mortgage can vary between lenders.
What If Your Income Changes Each Month?
Some people do not earn the same amount every month.
For example, your income may include overtime, commission or bonuses.
A lender may look at your earnings over a period of time.
It could then use an average.
This helps the lender avoid basing the mortgage on one unusually good month.
What If You Are Self-Employed?
Self-employed people can get mortgages.
However, the lender may assess income differently.
It may ask for information such as:
- accounts
- tax calculations
- tax year overviews
- business information
It may also look at income from more than one year.
The exact requirements vary between lenders.
What Is an Affordability Assessment?
An affordability assessment is the lender’s review of your finances.
It looks at the money you receive.
It also considers the money you already need to spend.
The lender uses this information to decide whether the mortgage payments are manageable.
This assessment can also affect how much you are allowed to borrow.
What Spending Will a Lender Consider?
Lenders can consider several types of spending.
For example:
Loans
Credit cards
Car finance
Childcare
Maintenance payments
Other mortgages
Regular household commitments
The lender may ask about other spending too.
Different lenders use different methods.
Therefore, affordability results can vary.
Why Do Debts Matter?
Debt payments reduce the money available for your mortgage.
For example, suppose you pay:
Personal loan: £300 per month
Car finance: £400 per month
Together, these cost:
£700 per month
That £700 is already committed before your mortgage and household bills are paid.
Therefore, existing debts can reduce mortgage affordability.
Do Credit Cards Affect Affordability?
They can.
A lender may look at your credit card balances and monthly payments.
For example, a large outstanding balance may increase your monthly financial commitments.
As a result, it could reduce the amount you can borrow.
However, lenders do not all treat credit cards in exactly the same way.
Does Car Finance Affect Affordability?
Yes, it can.
Car finance is a regular commitment.
For example, a payment of:
£450 per month
reduces the money available for other costs.
Therefore, it can affect the lender’s affordability calculation.
What About Student Loans?
Student loan repayments may also be considered.
If repayments are being taken from your income, they reduce your take-home pay.
Therefore, they can affect the money available each month.
The way lenders deal with student loans can vary.
Does Childcare Affect Mortgage Affordability?
It can.
Childcare can be a large regular household cost.
Therefore, lenders may consider it when looking at affordability.
The same can apply to other regular costs linked to dependants.
What About Maintenance Payments?
Regular maintenance payments can also affect affordability.
For example, if you make monthly child maintenance payments, the lender may treat them as a financial commitment.
Therefore, tell the lender about regular payments when asked.
Does Your Deposit Affect Affordability?
Your deposit affects how much you need to borrow.
For example:
Property price: £250,000
Deposit: £25,000
Mortgage needed: £225,000
However, with a £50,000 deposit:
Property price: £250,000
Deposit: £50,000
Mortgage needed: £200,000
The larger deposit means you need a smaller mortgage.
This may make the purchase more affordable.
However, a large deposit does not replace the lender’s affordability checks.
What Is Loan-to-Value?
Your deposit also affects your Loan-to-Value (LTV).
For example:
Property value: £200,000
Deposit: £20,000
Mortgage: £180,000
The LTV is:
90%
A larger deposit would reduce the LTV.
This may give you access to different mortgage deals.
However, LTV and affordability are not the same thing.
LTV and Affordability Are Different
This is an important difference.
LTV looks at the mortgage compared with the property’s value.
Affordability looks at whether you can manage the mortgage.
For example, you could have a very large deposit but a low income.
Your LTV may be low.
However, the lender still needs to check whether you can afford the monthly payments.
Therefore, a low LTV does not guarantee mortgage approval.
What Is an Income Multiple?
You may hear people estimate mortgages using an income multiple.
For example:
Income: £40,000
£40,000 × 4.5 = £180,000
This can give you a rough idea of possible borrowing.
However, it is not a full affordability assessment.
Your actual mortgage amount may be higher or lower.
Therefore, do not treat an income multiple as a guaranteed borrowing limit.
How Does a Joint Mortgage Affect Affordability?
With a joint mortgage, the lender can usually consider both applicants’ incomes.
For example:
Applicant 1: £35,000
Applicant 2: £25,000
Combined income: £60,000
However, the lender will also consider both applicants’ financial commitments.
Therefore, both incomes and both sets of expenses can matter.
Does Your Credit History Affect Affordability?
Your credit history and affordability are linked, but they are not the same thing.
Affordability looks at whether you can manage the mortgage.
Your credit history shows how you have managed borrowing and payments in the past.
The lender may consider both when making its decision.
Therefore, passing an affordability check does not automatically mean the mortgage will be approved.
Does Your Mortgage Term Affect Affordability?
Yes.
A longer mortgage term normally reduces the required monthly payment on a repayment mortgage.
For example, borrowing £200,000 over 35 years will usually have a lower monthly payment than borrowing the same amount over 20 years at the same rate.
This may make the monthly payment more affordable.
However, you will be borrowing for longer.
Therefore, you may pay more interest overall.
Does Your Age Matter?
Your age can affect the mortgage term available.
For example, your mortgage may continue into retirement.
If so, the lender may want to know how you will afford the payments later.
It may consider your expected retirement income.
Therefore, the issue is not simply your age. The lender also needs to understand how the mortgage will remain affordable.
What Is an Affordability Stress Test?
A mortgage needs to remain manageable if circumstances change.
Depending on the mortgage and current lending rules, a lender may consider whether you could cope with higher mortgage costs.
This is sometimes described as stress testing affordability.
The lender may not simply look at the payment you would make today.
Its exact method will depend on its lending rules and the mortgage.
Why Do Higher Interest Rates Matter?
Interest rates affect mortgage payments.
Suppose you can comfortably afford a mortgage at the current rate.
If the rate later increases, your payments could become higher.
This can happen with a variable mortgage.
It can also happen when a fixed-rate deal ends.
Therefore, consider whether you could cope with a higher payment.
A Simple Example
Imagine your mortgage payment is:
£900 per month
Ask yourself what would happen if it increased to:
£1,000
or
£1,100
Would the mortgage still be manageable?
You do not need to predict future rates.
Instead, the aim is to understand how much room you have in your budget.
Maximum Borrowing Is Not the Same as Affordability
A lender may offer you a large mortgage.
However, you do not have to borrow the maximum amount.
For example:
Maximum mortgage offered: £250,000
You may decide that borrowing:
£210,000
gives you more comfortable monthly payments.
This could leave more money for other parts of your life.
Therefore, the maximum mortgage is not always the most affordable mortgage.
Your Own Budget Matters Too
The lender carries out its affordability assessment.
However, you should also create your own budget.
You know your lifestyle and plans better than the lender.
For example, you may want money left each month for:
- savings
- holidays
- hobbies
- family costs
- home improvements
- emergencies
Therefore, think beyond simply passing the lender’s checks.
Remember the Cost of Running a Home
The mortgage is only one household cost.
You may also need to pay for:
- Council Tax
- energy
- water
- insurance
- broadband
- maintenance
- repairs
- service charges or factoring
- food
- transport
Therefore, a mortgage that looks affordable on its own may feel very different once all household costs are included.
Leave Money for Repairs
Homeowners are responsible for many repairs.
For example, you may need to replace a:
- boiler
- washing machine
- roof
- window
- electrical item
These costs can appear unexpectedly.
Therefore, leaving some room in your monthly budget can be useful.
Should You Clear Debts Before Applying?
Reducing debt can sometimes improve affordability.
For example, clearing a loan could remove a monthly payment.
However, using savings to clear debt could also reduce your deposit.
Therefore, there can be a trade-off.
You may need to compare the benefit of:
reducing debt
with
keeping a larger deposit
The best choice depends on your finances.
Can Affordability Differ Between Lenders?
Yes.
This is very important.
Different lenders use different affordability calculations.
For example, one lender may be comfortable offering a certain mortgage amount.
Another may offer less.
They may treat your income or spending differently.
Therefore, being declined by one lender does not automatically mean every lender will make the same decision.
Can Affordability Change?
Yes.
Your affordability can change if your finances change.
For example, you may:
- receive a pay rise
- repay a loan
- take out new credit
- change jobs
- reduce working hours
- have a child
- increase your deposit
Mortgage rates can change too.
Therefore, an affordability estimate from several months ago may no longer be accurate.
What Is a Mortgage in Principle?
A Mortgage in Principle can give you an early idea of how much a lender may be willing to lend.
It may also be called an:
Agreement in Principle
or
Decision in Principle
This can be useful when looking for a property.
However, it is not a final mortgage offer.
Why Can a Mortgage in Principle Change?
A Mortgage in Principle is based on the information available at the time.
The lender will carry out further checks during the full application.
It may then discover something that changes its decision.
The property also needs to be acceptable.
Therefore, the final mortgage can be different from the initial estimate.
Affordability When Remortgaging
Affordability can also matter when you remortgage.
For example, you may want to:
- move to another lender
- borrow more money
- change the mortgage term
The new lender may carry out its own affordability checks.
Therefore, having paid your existing mortgage without problems does not guarantee that another lender will offer the amount you want.
Affordability for Buy-to-Let
Buy-to-let mortgages work differently.
The lender may consider your personal circumstances.
However, the property’s expected rent is also important.
It may check whether the rent provides enough cover for the mortgage interest under its rules.
Therefore, normal residential affordability calculations should not be used for buy-to-let mortgages.
Affordability for a Second Home
If you are buying a second home, the lender needs to consider your existing property.
For example, you may already have a mortgage.
You will also have the running costs of two homes.
Therefore, the lender needs to decide whether both properties are affordable.
How Can You Improve Mortgage Affordability?
There is no guaranteed way to increase the amount a lender will offer.
However, some changes may help.
For example, you could:
- reduce existing debts
- avoid taking on unnecessary new credit
- build a larger deposit
- review regular spending
- provide clear evidence of your income
- consider a suitable mortgage term
However, do not make major financial decisions only to increase mortgage borrowing.
Consider your wider financial position too.
Before Applying for a Mortgage
It can help to gather some basic information.
Start with your:
Annual income
Monthly take-home pay
Savings and deposit
Loan balances
Monthly loan payments
Credit card balances
Car finance
Regular household costs
Childcare or maintenance costs
Then consider the likely mortgage payment.
This will give you a clearer picture before you apply.
Create Your Own Affordability Check
A simple household budget can be very useful.
Start with your monthly income.
Then subtract your expected costs.
For example:
Mortgage
Council Tax
Energy and water
Food
Transport
Insurance
Debt payments
Phone and broadband
Savings
Other regular spending
Then look at what remains.
Also, consider whether the budget could cope with an unexpected bill.
The Key Point
Mortgage affordability is about much more than your salary.
A lender may consider your income, debts, spending and other financial commitments.
Your deposit and mortgage term can also affect the mortgage you need and its monthly cost.
However, passing a lender’s affordability assessment is only part of the picture.
You should also decide what feels affordable for you.
There is an important difference between:
the mortgage you can get
and
the mortgage you can comfortably manage.
Leaving some room in your budget can help you deal with repairs, higher bills and other changes.
A mortgage should not only be affordable on the day you take it out. It should fit comfortably within your wider finances too.