Before applying for a mortgage, you need to think about more than just whether or not you can afford the monthly payments. Mortgage providers will scrutinise your circumstances, income and outgoings to see if you can keep up with repayments if interest rates were to rise or your situation changes. This can be especially difficult for first-time buyers.
How to check how much mortgage you can afford
In the past, mortgage lenders based the amount you could take out on a multiple of your income.
This is known as the loan-to-income ratio. For example, if your yearly income was £50,000, you may have been able to borrow up to five times that, giving you a mortgage of £250,000.
However, now when you apply for a mortgage, the lender will cap the loan-to-income ratio at 4.5times your income.
They must also assess the level of monthly repayments you can afford after taking into account various personal and living expenses, as well as your income, which is called an affordability assessment.
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The lender will take into account several things, including your income, which includes:
Your basic income
Income from your pension or investments
Income in the form of child maintenance and financial support from ex-spouses
Any other earnings, for example, from overtime, commission or bonus payments or a second job or freelance work.
As evidence of your income, you will need to provide:
Bank statements
Business accounts
Details of the income tax you have paid
The lender will also ask you to disclose your outgoings, which include:
Credit card repayments
Maintenance payments
Insurance – building, contents, travel, pet, life, car etc.
Any other loans or credit agreements you may have
Utility bills such as water, gas, electricity, phone and broadband
Lenders may also ask you for estimates of your living costs, such as spending on clothes, basic amenities and childcare.
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They may also ask to see some recent bank statements to reinforce the figures you supply.
The lender will also assess whether you would be able to pay your mortgage if your circumstances change.
These circumstances include:
Interest rates going up
You or your partner being made redundant or losing your job
In the event you couldn’t work due to illness
Your life has changed, such as having a baby or taking a career break.
Before taking out a mortgage, it’s important you think ahead and plan how you will meet your payments.
For example, you can help to protect yourself against unexpected drops in income by saving up as much as you can, as often as you can.
Try to make sure your savings pot contains enough money for three months’ outgoings, including your mortgage payments.
To see how much you could borrow based on your individual circumstances, you can use this mortgage calculator from Bankrate.