What is my mortgage affordability?
So – you’re thinking about buying a new home. It’s likely that in order to afford the property you’re looking for, you’ll need to take out a mortgage. But how much can you actually afford to borrow?
So – you’re thinking about buying a new home. Wahoo! Like most people in the UK, it’s likely that in order to afford the property you’re looking for, you’ll need to take out a mortgage. But how much can you actually afford to borrow?
If you’re not sure of the answer to my question, you’re in the right place. I’m an experienced (and very helpful) mortgage adviser, with offices based across both Worcester and Malvern. Here’s my run down of the steps you’ll need to take in order to figure out just how much you can borrow from a mortgage provider.
1) Calculate what you earn
This first step might sound simple, but there are actually a tonne of variables within your monthly income that can make an impact on your overall mortgage figure. So before you head to a mortgage calculator, you’ll need to calculate your earnings, including any additional income from a second job or other sources.
It’s also important to factor in overtime and bonuses. Many mortgage providers will want to look at your three most recent payslips to assess how regular this overtime is. However, lenders do treat these variables differently, so it’s a good idea to visit a mortgage broker to discuss which option is best for you.
This can become a little bit more complicated if you’re a business owner or if you’re self-employed. In this case, it would be ideal for you to discuss your options with a broker directly. Many mortgage providers will take an average of 2 years’ net profit, which is your income minus business expenses. It’s essential to factor in your business’ performance here, as if the most recent year’s profits have been particularly low, a mortgage provider will likely use that figure to calculate how much they’re willing to lend you.
If you’re a company director, this counts as employment. However, if your shareholding is 25% or more, its deemed that you’re involved significantly with the business, and you have more control of your salary. At this point, the lender may look at the profit of the business, assessing whether its sustainable enough for you to pay the monthly mortgage costs. Here, it’s a good idea to choose a broker that understands businesses and business structure.
2) Calculate your commitments
Not only will a mortgage provider use your incomings to calculate how much they’re willing to lend you, but they’ll also take your outgoings into account, too. This includes things like loans, credit cards and anything you might have on finance. Lenders want to lend responsibly, and need to make sure you can afford to pay them back.
As well as credit cards and loans you might want to take off anything like household commitments, any funds you’d like to put aside for renovation (garden bar anyone?), and things like pensions and medical schemes. These costs add up – and it’s really important for you to calculate them so your mortgage provider can decide what’s an affordable amount for you to pay back each month.
As with most big purchases, you’ll want to give yourself the best deal. You can potentially boost the amount that a lender is willing to let you borrow by paying off any remaining credit card or loan bills, but this might mean taking a chunk of your deposit away. It really does depend on the lender though, because a higher deposit often means you can borrow more. This is because lenders, naturally, only want to lend money if they know you’re going to be able to pay them back.
If you’re a first-time buyer, calculating all the hidden costs involved when getting your first home can be really complicated. Read my article on calculating your budget.
3) Ask yourself - is it affordable?
It’s no use getting a mortgage you can’t afford. Firstly, you won’t be able to afford to do your house up, and secondly, you might even lose it if you can’t keep up the repayments. You’ll need to make sure that your mortgage is affordable, not only for now but also for the future if your situation is to change. You might want to start a family or go travelling, and a huge monthly payment could throw a big, expensive spanner in the works.
To make your mortgage more affordable it might be worth considering the length you’d like to borrow for. Your monthly repayments can change depending on the term of your mortgage, as a shorter term will mean you’ll be paying more over a shorter amount of time. Many brokers recommend a longer term, giving you a smaller monthly payment that’s more affordable, as well as increase the amount that lenders are willing to offer you.
4) Do you need to make any changes?
Once you’ve found out how much a lender is willing to offer you for your mortgage, add this to the deposit you’re intending to put down. This will give you an overall figure that you can run to your estate agents with, and depending on a number of factors, might be more or less than you were expecting.
If it’s less than you were expecting, and you’ve got your eye on properties that are just out of your budget, it might be worth making a few changes. This could mean taking a longer-term mortgage, saving for longer to get a bigger deposit, or assessing your monthly commitments to see what you really need (or don’t need). I’d recommend putting down as big of a deposit you can to help reduce those payments and get you moving into a property you really love. It might just mean getting your first home could take a little longer than expected, but it will be worth it!
If it’s more than you’re expecting – then ooh, lucky you! You could even decide to reduce the term on your mortgage if the monthly repayments are affordable, and pay it off quicker.
5) Go shopping!
Now you’ve got the budget, you can start searching for your new home!
Here, it’s essential that you factor in any additional costs of moving home, such as legal fees and property surveys. I’ve got a guide for that, too – just click here to read it.
How Can I Help You?
Nice to meet you! I’m Gareth, but you can call me Big G. As an estate agent and mortgage adviser with over 20 years’ experience within the property industry, I’m passionate about equipping homebuyers with the knowledge they need to find a property that’s perfect for them.
If you’ve got a question about mortgages, the costs of buying a new home or would like to know more, just give me a call on 01905 426000 and we can chat more about your next steps.
Written by Gareth Evans, Mortgage Adviser & Director