|How Much Can You Afford?
A Guide to Mortgage Affordability
Buying a home is a very emotional experience. Just as they do when buying a car, people often get caught up in the moment and end up with more than they can afford in terms of their mortgage calculator.
The difference is that a home generally costs a lot more than a car and is an even longer term investment, so knowing what you can comfortably afford in terms of mortgage affordability is one of the key first steps in the process.
Also, bear in mind (even considering the current economic climate) that lenders may be cutting down on credit, but that doesn't mean that they will stop you from taking out a mortgage that is more than you can afford when they go through your mortgage calculator process—that part is your responsibility. So, how much can you afford?
Mortgage affordability: How much is "normal"?
A good rule of thumb for mortgage affordability is that most people will qualify for a mortgage equal to about three times your salary as an individual and two and a half times your joint salaries as a couple. In recent years some banks—in the wake of huge increases in property costs—have raised their limits with some even offering five times your salary, but given the current climate, these kinds of loans will not generally be offered (and would be too much for most of us to manage in any case). So, this will give you a very rough idea of what you will qualify for, but not necessarily what you can afford, as mortgage affordability is different from mortgage qualification. You need to look at your cash flow and determine what makes sense in terms of mortgage affordability for you.
So, assuming the two and a half times joint annual income ratio, this means that if you and your spouse/partner each earn £25,000 a year then you can, on average, expect to qualify for a mortgage of around £125,000.
Keep in mind, though, that lenders are very particular when it comes to defining your income. If you are self-employed, work lots of overtime, or work in a job where commission (or even tips) make up a large proportion of your salary, then you may need to prove that this portion of your income is sustainable for mortgage calculator purposes. Or, you may even need to take out a specialist type of self-employed mortgage. But, being able to demonstrate that you have received a certain amount consistently in commission/self-employed income for the past 2-3 years, for example, will help ensure that this variable income is factored into your mortgage calculator and mortgage affordability qualification.
Qualifying when you're a commission earner and/or self-employed
If you are self-employed or work on a commission basis, then many lenders will ask to see specific information that proves your income for their mortgage calculator purposes. So, for example, they may need to see audited accounts going back for three years or they may need to see proof of commission and commission structures.
Unfortunately, most self-employed individuals will find that all the work they did to keep their net taxable income low can have a negative impact on their qualifying for a mortgage. Why is this? Simply put, when it comes to mortgage affordability, lenders don't like taking risks and they don't like the idea of lending to someone whose future income is uncertain. And, they may well average out your income over the three years which could cut into your borrowing capability even though your mortgage affordability may be fine on a base level. If you earn commission payments then some lenders will only allow a percentage of them to be taken into consideration.
And, as the aim of the self-employed is often to keep tax costs low, this means that lots of people who truly can afford a large mortgage have trouble qualifying for that mortgage because they declare very little income for tax purposes—something to keep in mind in terms of mortgage affordability.
The good news about self-employed mortgage affordability
Don't assume that you cannot get a mortgage if you are self-employed or a commission earner. Many major name lenders will have special mortgage ranges for this sector of the population. And, if you can't qualify for these mortgages or want something different, then you can always look at a self-certification mortgage. These deals allow you to state your own income, and don't come with many of the restrictions that standard deals have. Although, do bear in mind that you may need to put down a bigger deposit and your interest rates may be higher than the norm.
Qualifying: How lenders work out what you can borrow
When you apply for a mortgage, most lenders will go through a process of checking your ability to meet your repayment commitments via a mortgage calculator process. This process is often known as a mortgage affordability assessment. Bear in mind that the actual way that this is assessed may vary from lender to lender, but on the whole they will look at:
- Your income(s).
- Your existing debts and other financial commitments.
- Your everyday living costs (i.e. bills and living costs).
- Your credit record.
This mortgage calculator information tells the lender how much you can technically afford to repay each month and how much of a risk you will be. This can affect the amount that you can borrow and the interest rates that you are charged.
Now, how much can you afford in real terms?
Even though you may qualify for a specific amount for a mortgage on paper, it doesn't mean that you should apply for that amount as a matter of course. After all, a lot of what you can afford (as opposed to qualify for) is about your lifestyle. For example, if you like to eat out a lot then your ability to afford a certain level of mortgage will be different from someone who eats at home all the time and takes a packed lunch to work each day.
So, what's the best way to approach this? It's simple: work backwards to work out your mortgage affordability sum. Decide just how much you really, truly can afford to pay each month for your "shelter costs," and then work backwards to figure out how much of a mortgage you need. The term “shelter costs” doesn't just include your mortgage payment, but also any other cost related to your home, so factor in council tax, insurance costs, and bills.
The bottom line
How much can you afford? One last thing to remember when calculating your mortgage affordability is to be generous when calculating your costs and be conservative when calculating your income. It is far better to have a smaller mortgage that you can comfortably afford than to be tied into a larger mortgage that has you stretching every last penny. After all, there is no fun in getting that dream home, but then being unable to afford to buy furniture for it or to leave it for the occasional night out! So, when determining your mortgage affordability, remember not to take all the fun out of life and use your mortgage calculator correctly!
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