Insights

How is affordability for a mortgage calculated ?

A question, most people will need to know when buying a property, is how affordability for a mortgage is calculated?

In short, your income, expenses, and various financial factors are assessed to determine how much you can comfortably borrow without risking financial strain.

Lenders use specific criteria and calculations to make this assessment.

Mortgage calculated – Key Factors

Here are the key factors that typically go into the affordability calculation:

Income: Lenders will evaluate your gross annual income, which includes your salary, bonuses, overtime, and any other sources of income. If you have a steady source of income, it will be more favourable for your mortgage application.

Expenses: Your regular monthly expenses will be assessed, including rent or existing mortgage payments, utility bills, council tax, insurance premiums, and other financial commitments. Lenders will also factor in your estimated living expenses, such as food, transportation, and other discretionary spending.

Debt: Lenders will consider your existing debts, including credit card balances, personal loans, car loans, and any other financial obligations. They will calculate your debt-to-income ratio, which is the percentage of your income that goes toward servicing debt.

Interest Rates: Lenders will use a stress test to assess your ability to repay the mortgage at higher interest rates. They may use a “revert rate,” which is the lender’s standard variable rate (SVR) or a specific reference rate, to calculate whether you can afford the mortgage even if interest rates rise.

Loan Term: The term of the mortgage (e.g., 25 years, 30 years) can impact affordability. A longer-term mortgage may result in lower monthly payments, but you’ll pay more interest over the life of the loan.

Credit History: Your credit history and credit score play a significant role in mortgage affordability. Lenders will review your credit report to assess your creditworthiness.

Specific criteria

Each lender may have its own specific criteria for affordability assessments. These criteria can vary, so it’s essential to check with different lenders to understand their specific requirements.

To calculate affordability, lenders typically use an “income multiple” approach or an “affordability assessment.” The income multiple approach involves multiplying your gross annual income by a certain factor (usually between 3 and 5 times your income) to determine the maximum mortgage amount you can borrow.

Do you have any questions on affordability?

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(Think carefully before securing debt against your home. Your property may be repossessed if you do not keep up repayments on your mortgage.)