Affordability of a mortgage will be determined based on many different factors, and will vary across borrowers. In general, it is calculated based on monthly outgoings and income. Different aspects of a mortgage, such as interest rates and repayment period, will also impact the affordability of a mortgage.
What Is a Mortgage?
A mortgage is an agreement between borrowers and lenders in which a property is used as a guarantee for a loan to get money. When the mortgage transaction is made, borrowers receive money and promise to repay the loan. The lender will receive money paid back over time plus interest.
Mortgages can come from banks or other financial institutions and can be used not only to buy a house but also for refinancing existing properties.
What Mortgage Payment Can I Afford?
To determine what mortgage payment you can afford, lenders typically take into account different factors, including the following:
- Income
- Any monthly debts
- The amount of savings available for a down payment.
In addition to these factors, you should consider any unexpected costs that may arise and which could negatively impact your savings.
Experts recommend having three months of payments, including enough to cover your housing payments and other monthly debts, in savings which can act as a buffer in case of unexpected costs.
What Amount of Mortgage Can I Afford Based on My Salary?
Typically, mortgages are calculated based on around four times your annual income. However, it will also depend on your income source. For example, if your income is purely made up of your salary, you are more likely to get a mortgage than someone whose income source is a combination of benefits and their salary.
Salary is an important component of the mortgage equation but it will not be considered in isolation. Lenders will also look at the amount of debt an individual has and the value they are able to put as a down payment.
The majority of lenders will look at a person’s salary relative to the amount of debts they owe. This is what is known as the “debt-to-income” ratio. Debt-to-income ratios allow a lender to assess how affordable mortgage repayments are for a borrower.
If a person has lots of debt, they will have a greater load of monthly outgoing payments that they will be expected to make. This means that people who have a poorer debt-to-income ratio may struggle to be approved for a loan or may incur higher interest rates or additional fees.
Employment history, in addition to salary, also plays an important part. Practically all lenders will require proof of employment with many specifying a minimum of two years of past employment. Those without an employer, such as self-employed individuals, will need to demonstrate proof of income and may find it more difficult to be approved for a mortgage.
How Does Credit Score Impact Affordability?
A credit score is what lenders used to determine whether the borrower is a good candidate for a loan. The score is based on spending history, including any borrowing behaviour, and can see whether an individual makes repayments on time and their amount of debt. The higher the credit score, the better someone is as a candidate for a loan.
Individuals with higher credit scores are more likely to be approved for a loan as they demonstrate that they can meet payments and are careful with money. This may also mean that they qualify for better loan terms including better interest rates and fewer fees.
It is still possible to get a mortgage if you have a poor credit score, however it is usually more difficult and the terms tend to be less favourable.
How Does Down Payment Amount Impact Affordability?
A bigger down payment may save the borrower a lot of money in the long term. Borrowers will always need to put down some form of down payment when procuring a mortgage in order to protect the lender.
Although the standard down payment for a mortgage is 20% of the property’s value with 80% funded by the lender, it will vary between lenders. If a borrower is in the lucky position of providing a greater down payment, this can benefit both the lender and the borrower. Not only does it provide greater protection for the lenders, it means that the borrower will be able to save money in the long term due to increased equity in the property and not needing to pay mortgage insurance premiums.
