Mortgage Affordability Guide
How Much Can I Borrow?
One of the first questions people ask when thinking about buying a home is:
“How much can I borrow?”
It sounds like a simple question, but there isn't one universal answer.
Different mortgage lenders can assess the same household differently. Your income is important, but lenders may also consider your existing credit commitments, dependants, expenditure, mortgage term, deposit, property and the type of income you receive.
This is why an online calculator can be useful as a starting point but shouldn't be treated as a guaranteed mortgage amount.
Understanding mortgage affordability before seriously searching for a property can help you set a realistic budget and avoid becoming committed to a property that may not fit your borrowing position.
What Is Mortgage Affordability?
Mortgage affordability is the lender's assessment of whether the proposed mortgage is affordable based on your circumstances and its lending rules.
The lender isn't simply deciding whether you can afford today's monthly mortgage payment.
Its assessment can take account of your income, financial commitments and other relevant circumstances, alongside its own affordability methodology.
Each lender has its own criteria and affordability model.
That means:
Lender A could potentially offer a different maximum mortgage from Lender B using exactly the same applicant information.
How Much Can I Borrow?
You may hear general rules suggesting that you can borrow a certain multiple of your annual income.
Income multiples can form part of mortgage lending, but they don't tell the whole story.
For example, two households earning £60,000 per year might not have the same borrowing capacity.
One might have very few financial commitments.
The other might have:
Car finance
Personal loans
Credit card balances
Childcare costs
Dependants
Student loan deductions
Other regular commitments
Their affordability results could therefore be different despite having identical headline income.
What Is an Income Multiple?
An income multiple compares the proposed mortgage with the applicant's eligible income.
For example, if someone earns £40,000 and wants to borrow £160,000, the mortgage represents four times that income.
However, this doesn't mean every person earning £40,000 can automatically borrow £160,000.
Nor does it mean that four times income is a universal maximum.
Lenders have their own rules concerning income multiples, affordability and the circumstances in which different borrowing levels may be considered.
What Income Can Be Used for a Mortgage?
This depends on the lender and the type of income.
Income that may potentially be considered can include:
Basic salary
Overtime
Bonuses
Commission
Shift allowances
Second-job income
Self-employed income
Pension income
Rental income
Certain benefits
Maintenance income
Other acceptable income
The important word is acceptable.
Different lenders have different rules about which income they will use and how much of it they will include.
Is Basic Salary Used in Full?
A lender may normally start by considering your basic employment income, subject to verification and its criteria.
You may need to provide documents such as payslips and bank statements.
The lender may also consider your employment status, including whether you are:
Permanently employed
On probation
Working under a fixed-term contract
In a new job
Employed through an agency
Working multiple jobs
Starting a new job doesn't automatically mean you can't get a mortgage.
The lender's criteria determine how the situation is treated.
Can Overtime Be Used?
Potentially.
If overtime forms a regular part of your earnings, some lenders may include it within their affordability assessment.
However, lenders can differ in:
How much overtime they accept
How they calculate it
How much history they require
Whether they average the income
How they treat recent increases or fluctuations
Don't simply add all overtime from your latest payslip to your annual salary and assume every lender will use it.
Can Bonuses Be Used?
Potentially, subject to lender criteria.
Some lenders may use a proportion of bonus income, while others may have different requirements depending on whether the bonus is regular, guaranteed or discretionary.
They may also consider the history of bonuses received.
The same principle applies to commission.
What About Commission?
Commission can form a substantial part of some people's income.
Mortgage lenders can have different approaches to assessing it.
They may consider:
Recent commission
Historical commission
Average commission
Frequency of payment
Whether the income appears sustainable
This can result in different lenders arriving at different assessable income figures.
What If I Have Two Jobs?
Income from a second job may potentially be considered.
The lender may want to establish that the employment is sustainable and that working both jobs is realistic.
It may also consider how long you've held the second job and the number of hours worked.
Again, criteria vary between lenders.
How Is Self-Employed Income Assessed?
Self-employed affordability can be more complex because lenders don't all assess business owners in the same way.
For example, a sole trader may be assessed using taxable profits.
A limited-company director might be assessed using salary and dividends with one lender, while another lender may have criteria allowing it to consider a different measure of company profitability.
Contractors and CIS workers can also have different assessment methods.
For a detailed explanation, read our Self-Employed Mortgage Guide.
Do Benefits Count as Income?
Some lenders may accept certain benefit income within their affordability assessment.
However, the treatment varies considerably.
A lender may consider:
Type of benefit
Amount received
How long it is expected to continue
Applicant circumstances
Whether there is other earned income
Some lenders may use particular benefits fully, partially or not at all.
If benefit income forms an important part of household income, this should be identified before selecting a lender.
Does Maintenance Income Count?
Some lenders may consider maintenance income, subject to their criteria.
Evidence may be required, and the lender may have rules concerning the source, payment history and how long the income is expected to continue.
Don't assume every lender will treat maintenance income identically.
Does Rental Income Help My Residential Mortgage Affordability?
Potentially, but the treatment depends on the lender and circumstances.
If you own rental property, a lender may want details of:
Rental income
Existing buy to let mortgages
Mortgage payments
Property values
Associated commitments
Some lenders may treat self-financing buy to let properties differently from properties creating an ongoing financial shortfall.
What Financial Commitments Affect Mortgage Affordability?
Mortgage lenders may consider existing financial commitments when assessing how much you can afford to borrow.
These can include:
Personal loans
Car finance
Hire purchase
Credit cards
Student loans
Child maintenance
Childcare
Other mortgages
Buy Now Pay Later commitments
Other regular credit agreements
The existence of a commitment doesn't automatically prevent you from obtaining a mortgage.
It can, however, affect the affordability calculation.
Do Credit Card Balances Affect Affordability?
They can.
A lender may account for credit card debt when assessing affordability even if you currently make only the minimum monthly payment.
Different lenders can calculate the commitment differently.
If you intend to repay a credit card before completion, tell your mortgage adviser.
Whether the lender can disregard the commitment will depend on its criteria and the circumstances.
Does Car Finance Affect How Much I Can Borrow?
Potentially, yes.
Car finance can represent a significant monthly commitment.
A £400 monthly car payment, for example, means £400 of household income is already committed before the mortgage and other expenditure are considered.
The lender will assess the commitment according to its affordability model.
This doesn't mean you should automatically repay car finance before applying.
The cost of doing so and your wider financial position should be considered first.
What About Buy Now Pay Later?
Buy Now Pay Later arrangements can form part of your wider credit position and may be relevant to a mortgage application.
Regular reliance on short-term credit can also result in questions depending on the lender and circumstances.
During the period leading up to a mortgage application, maintaining stable and well-managed finances is generally preferable to taking on unnecessary new borrowing.
Do Dependants Affect Mortgage Affordability?
They can.
Children and other financially dependent household members can affect household expenditure.
Lenders can take dependants into account within their affordability calculations.
This is another reason two applicants with the same income may receive different affordability results.
Does Childcare Affect Affordability?
Potentially.
Nursery fees and other childcare costs can be significant household commitments.
The lender may take these into account when assessing affordability.
If childcare costs are expected to change, explain the circumstances to your mortgage adviser rather than simply removing the commitment from the figures.
The lender will decide how it can treat the expenditure.
Does My Credit Score Determine How Much I Can Borrow?
Not directly in the simple way people sometimes assume.
Credit history and affordability are related but separate parts of a mortgage assessment.
A strong credit profile doesn't automatically mean you can borrow any amount you want.
Likewise, passing an affordability calculation doesn't guarantee that you'll satisfy the lender's credit criteria.
The lender considers the overall application.
Does My Deposit Affect How Much I Can Borrow?
Yes, but in a different way from income affordability.
Your deposit determines the loan-to-value of the mortgage alongside the property price.
For example:
Property price: £250,000
Deposit: £25,000
Mortgage required: £225,000
Loan-to-value: 90%
Increasing the deposit to £50,000 would reduce the required mortgage to £200,000 and the LTV to 80%.
A larger deposit can therefore reduce the amount you need to borrow and may provide access to different mortgage products, subject to lender criteria.
What Is Loan-to-Value?
Loan-to-value, usually abbreviated to LTV, compares the mortgage amount with the property's value or purchase price used by the lender.
It is calculated as:
Mortgage amount ÷ Property value × 100
LTV is important because mortgage products are commonly available within particular LTV bands.
The interest rate and product options available can therefore change depending on your deposit and LTV.
Can a Bigger Deposit Increase My Maximum Mortgage?
Not necessarily.
A bigger deposit can improve your loan-to-value and reduce the amount you need to borrow.
But it doesn't automatically increase the maximum mortgage a lender considers affordable.
You still need to pass the lender's affordability and other criteria.
Think of deposit/LTV and affordability as related but different parts of the mortgage assessment.
Does the Mortgage Term Affect Affordability?
It can.
A longer mortgage term spreads repayment of the capital over a longer period, reducing the contractual monthly repayment compared with the same mortgage over a shorter term, assuming the same interest rate.
This can affect affordability.
However, extending the mortgage term has an important trade-off.
Borrowing for longer can increase the total amount of interest you pay.
The lowest possible monthly payment shouldn't therefore automatically be the objective.
Does My Age Affect the Mortgage Term?
Potentially.
Mortgage lenders have criteria concerning maximum ages and mortgage terms.
Retirement can also become relevant where a mortgage is expected to continue beyond anticipated retirement age.
The lender may need to understand how the mortgage will remain affordable later in the term.
Criteria vary significantly between lenders.
Why Can Two Lenders Offer Different Amounts?
This is one of the most important things to understand about mortgage affordability.
Different lenders can have different:
Affordability models
Income multiples
Treatment of bonuses
Overtime calculations
Commission calculations
Self-employed income assessments
Benefit-income rules
Treatment of credit commitments
Maximum mortgage terms
Age criteria
Loan-to-value restrictions
So when one lender says you can potentially borrow a particular amount, that isn't necessarily the maximum available across the mortgage market.
Likewise, a higher borrowing figure doesn't automatically make a lender or mortgage more appropriate.
What Is Mortgage Stress Testing?
Mortgage lenders need to consider whether borrowing is affordable under their applicable requirements rather than looking only at the initial payment in isolation.
Their affordability assessment may therefore consider how mortgage costs could change under relevant assumptions.
The exact methodology varies according to lender, product and applicable requirements.
This is one reason an online calculation based solely on today's advertised interest rate may not reproduce a lender's actual affordability result.
What Is an Agreement in Principle?
An Agreement in Principle — also called an AIP, Decision in Principle or Mortgage in Principle — provides an initial indication of what a lender may potentially be prepared to lend based on information provided at that stage.
It isn't a mortgage offer.
The full application remains subject to areas including:
Verification of information
Full underwriting
Credit assessment
Property valuation
Property acceptability
Lender criteria
Our Agreement in Principle Guide explains this process in more detail.
Should I Get an AIP Before Viewing Properties?
You don't necessarily need an AIP simply to look at a property.
However, understanding your mortgage position before becoming seriously involved in a purchase can be very useful.
It can help establish:
Approximate borrowing
Deposit requirement
Potential purchase budget
Whether there are obvious lender-criteria issues
This can make your property search more focused.
Mortgage Affordability vs Purchase Budget
These aren't necessarily the same thing.
Imagine a lender is potentially prepared to lend you £250,000.
That doesn't automatically mean you should borrow £250,000.
Your personal budget should also consider:
Mortgage payments
Council Tax
Utilities
Insurance
Maintenance
Transport
Childcare
Savings
Lifestyle expenditure
Future plans
The maximum a lender is willing to offer and the amount you feel comfortable repaying can be very different numbers.
Don't Forget the Costs of Buying
Your deposit isn't the only money you may need.
Depending on your circumstances and property, buying can involve costs such as:
Solicitor or conveyancer fees
Survey costs
Mortgage fees
Valuation costs where applicable
Moving costs
Insurance
Tax where applicable
Initial repairs or improvements
Avoid using every available pound for the deposit without considering what money you'll need after completion.
Should I Borrow the Maximum Available?
Not necessarily.
A maximum borrowing figure tells you what a particular lender may potentially consider under its criteria.
It doesn't tell you what mortgage payment will feel comfortable within your lifestyle.
Before deciding your budget, consider how the mortgage would interact with your other financial priorities.
You may want money available for:
Savings
Holidays
Children
Cars
Home improvements
Retirement planning
Emergencies
Other financial goals
Affordability should work in real life, not just on a lender's calculator.
Can I Improve My Mortgage Affordability?
Sometimes changes to your circumstances can affect the calculation.
Potential factors might include:
Repaying certain debts
Reducing ongoing credit commitments
Increasing the deposit
Using acceptable additional income
Considering a different mortgage term
Applying jointly where appropriate
Considering lenders with criteria that better reflect your income
However, don't repay debts, extend borrowing terms or make major financial changes purely to influence a mortgage calculator without considering the wider consequences.
Sometimes the issue isn't your finances.
It may simply be that another lender assesses your circumstances differently.
Should I Take Out New Credit Before Applying?
Be cautious about making significant changes to your credit position while preparing for a mortgage.
Taking out:
New car finance
Personal loans
Credit cards
Large Buy Now Pay Later commitments
could affect affordability or your credit position.
If you've already obtained an Agreement in Principle or submitted a mortgage application, don't assume the lender will never check your circumstances again.
If you need to make a significant financial change during the mortgage process, speak to your mortgage adviser first.
What If My Circumstances Change After My AIP?
Tell your mortgage adviser.
Relevant changes could include:
New job
Salary change
Reduced hours
New credit
Increased debt
New childcare costs
Becoming self-employed
Changes to your deposit
Changes to the purchase price
An AIP was based on the information available at that time.
A material change can therefore affect the mortgage position.
How Accurate Are Online Mortgage Calculators?
Mortgage calculators can be useful planning tools.
They can help you explore areas such as:
Approximate monthly repayments
Different mortgage amounts
Interest-rate changes
Mortgage terms
Deposit scenarios
But a simple calculator doesn't know your complete financial circumstances or reproduce every lender's underwriting criteria.
Use it to explore scenarios rather than treating the result as a mortgage approval.
You can use our Mortgage Calculators to explore different mortgage scenarios.
What Information Should I Prepare for an Affordability Review?
Having accurate information makes the initial assessment much more useful.
Prepare:
☐ Basic annual income
☐ Overtime
☐ Bonuses
☐ Commission
☐ Second-job income
☐ Self-employed income where applicable
☐ Benefit or pension income where relevant
☐ Loans
☐ Car finance
☐ Credit-card balances
☐ Childcare
☐ Maintenance commitments
☐ Dependants
☐ Existing mortgages
☐ Deposit amount
☐ Target property price
☐ Preferred monthly mortgage budget
☐ Preferred mortgage term
The more accurate the information, the more meaningful the affordability discussion can be.
How Cambs Ely Mortgages Can Help
Mortgage affordability isn't simply about typing your salary into a calculator.
The way lenders assess income and commitments can differ significantly, particularly where applicants have:
Overtime
Bonuses
Commission
Self-employed income
Company-director income
Contract income
CIS income
Benefit income
Multiple income sources
Existing credit commitments
Cambs Ely Mortgages can review your circumstances and investigate how relevant mortgage lenders may assess your borrowing position.
Understanding this before you find a property can give you a clearer idea of your realistic purchase budget and help you approach your property search with greater confidence.
We help clients in Ely, Cambridge, Cambridgeshire, East Anglia and across England, with appointments available remotely.
Building Blocks for a Brighter Future.
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Important Information
This guide provides general information and shouldn't be treated as personalised mortgage, financial, tax or legal advice.
Mortgage affordability calculations vary between lenders and depend on individual circumstances, lender criteria, income, expenditure, credit commitments, property and other factors.
An affordability calculation or Agreement in Principle isn't a guarantee that a mortgage application will be approved.
Your home may be repossessed if you do not keep up repayments on your mortgage.