The mortgage you can afford will depend on many different factors and will vary from borrower to borrower. Additionally, different lenders will have different lending criteria. Mortgage affordability is typically calculated based on monthly outgoings and income.
What Is a Mortgage?
A mortgage is a type of home loan and acts as an agreement between borrowers and lenders in which a property is used as a guarantee. Once the mortgage transaction is made, borrowers will receive money and agree to a repayment plan with interest paid back to the lender over a set time period.
What Mortgage Can I Afford?
Before taking out a mortgage, lenders will look at a borrower to see if they want to lend them the money. Through this process, they will take into account the following details:
- Income
- Monthly outgoing payments (including any debts)
- The amount of savings available to put down as a deposit
Experts suggest that a good rule of thumb is for your total mortgage not to exceed 28% of your pre-tax monthly income.
How Important Is Salary When Determining What Mortgage I Can Afford?
There are different opinions when it comes to factoring in your salary when calculating your mortgage. Many recommend that mortgages should be based on around four times your annual income. However, it will also depend on your income source. A fixed monthly income will always be more compelling for lenders than someone whose monthly income is dependent on benefits.
One of the most important factors that should be taken into consideration when calculating mortgage affordability is an individual’s “debt-to-income” ratio which is a person’s salary relative to the amount of debts they owe. Greater debts means a higher volume of monthly outgoing payments for an individual to pay. This in turn may mean they are less eligible for a mortgage or are subject to less favourable terms such as higher interest rates.
In addition to salary, the majority of lenders will require proof of employment with many specifying a minimum of two years of past employment. Individuals who are self-employed, between jobs or who are not in full-time employment will find it more difficult to demonstrate their financial history.
Will My Credit Score Impact Which Mortgage I Can Afford?
Lenders will look at credit score in order to evaluate if the borrower is a good candidate for a loan. Credit scores are 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.
If you have a higher credit score, you may be more likely to be approved for a loan as it shows that you can reliably meet payments. This in turn may mean that you can 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.
Does the Amount of Deposit Affect Mortgage Affordability?
The standard down payment for a mortgage is 20% of the property’s value with 80% funded by the lender, but this varies between lenders and different mortgage products. If a borrower is able to put down a bigger deposit, it could save them money in the long term. It is also less of a risk for the lender meaning that they may be able to offer better loan conditions such as lower interest rates and shorter repayment period.
