Before applying for a mortgage, you need to think about more than just whether you can afford the monthly repayments. Mortgage providers will look at your income and outgoings to see if you can keep up with repayments if interest rates rise or your circumstances change.
What’s in this guide
How lenders assess what you can afford
Mortgage lenders base their decisions on what’s known as the loan-to-income ratio – the amount you want to borrow divided by how much you earn.
The most you can borrow is usually capped at four-and-a-half times your annual income
Have you had mortgage advice?
You can get advice directly from a lender who will discuss their own products, or from a broker who’ll be able to look at mortgages from a range of providers.
Read Mortgage advice: should you use a mortgage adviser? for details of where to get advice.
Use our Mortgage Affordability Calculator
Use our Mortgage Affordability Calculator to estimate how much you can borrow.
They must also assess the monthly payment you can afford, after looking at your outgoings as well as your income.
This is called an affordability assessment.
The lender must also look ahead and ‘stress test’ your ability to repay the mortgage.
This is to make sure you’ll still afford repayments if the interest rate rises or there is a change to your lifestyle, such as:
- redundancy
- having a baby, or
- taking a career break.
If the lender thinks you won’t be able to afford your mortgage payments in these circumstances, they might limit how much you can borrow.
Comparison websites are a good starting point for anyone trying to find a mortgage tailored to their needs.
Some of the biggest mortgage comparison websites are:
- Comparison websites won’t all give you the same results, so make sure you use more than one site before making a decision.
- It’s also important to do some research into the type of product and features you need before making a purchase or changing supplier.
What the lender takes into account
When working out how much you can afford to borrow, the lender will look at:
1. Your income
This will include:
- 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 you have – for example, from overtime, commission or bonus payments or a second job or freelance work.
You will need to provide pay slips and bank statements as evidence of your income.
If you’re self-employed you’ll need to provide:
- bank statements
- business accounts
- details of the income tax you’ve paid.
You will normally have to provide two- or three-years’ worth of tax returns and business accounts.
2. Your outgoings
Check your credit report
It’s a good idea to check your credit report before applying for a mortgage.
This will give you time to correct any mistakes in it and will notify you of any missed credit payments that could make the mortgage lender turn you down.
This might include:
- credit card repayments
- maintenance payments
- insurance - building, contents, travel, pet, life, etc
- any other loans or credit agreements you might have
- bills such as water, gas, electricity, phone, broadband.
The lender might ask for estimates of your living costs such as spending on clothes, basic recreation and childcare.
They might also ask to see some recent bank statements to back up the figures you supply.
3. Future changes that might make an impact
The lender will assess whether you’d be able to pay your mortgage if:
- interest rates increased
- you or your partner lost their job
- you couldn’t work because of illness
- your life changed, such as having a baby or a career break.
It’s important that you also think ahead and plan how you’d meet your payments.
For example, you can help to protect yourself against unexpected drops in income by building up savings when you can.
Try to make sure it contains enough for three months’ outgoings, including your mortgage payments.
Government schemes
If you’re struggling to get approved for a mortgage or only have a small deposit, there are a number of government schemes available to help.
Join our Facebook group
Join our private Budgeting and Saving Facebook group for money-saving tips and support from a community of savers.
