Mortgage affordability is the term we use when we’re talking about the amount of money a lender is going to lend you. It’s come a long way since the old days when it was simply a case of multiplying your income. Back then it would either be three and a half times your single income or 2.75 times your joint income. And you’d go down to the local Building Society with the cap in your hand and you’d ask them to please lend you some money and they’d make a decision.
But now that’s all gone. What we have now is a much more complicated business. Lenders now use specialist calculators to work out what they’ll lend and every lender’s calculator and every lender’s calculation is different. So lender ‘A’ might lend a certain amount and lender ‘B’ might lend you a completely different amount, but crucially they all look at similar sorts of things. It’s just how they use that information to get the figures that is key.
How is mortgage affordability calculated these days?
The first thing that mortgage lenders will look at is any credit commitments that you have – monthly loan payments, hire purchase, car finance, that sort of thing. Credit cards are normally looked at as a percentage of the debt outstanding. So they’ll say, “we’re going to assume that you’re making a repayment of X percent on that balance each month. And that’s the figure we’re going to use for our affordability purposes.”
Some lenders will also look at deductions on payslips, such as pension payments, others will choose to ignore them. If you’ve got anything coming off your payslip, this can have an effect on how much you can borrow, depending on which lender you speak to. Financial dependents, such as children or elderly relatives, are another consideration. Lenders will assume that you have a payment or cost each month for that financial dependent. And again, the amount they allocate for that cost varies from lender to lender.
A final point to remember with affordability is the loan to value. The amount of deposit you have to purchase (or remortgage) the property. People with a lower deposit often won’t get the higher affordability calculations because there’s an increased risk from a lender’s perspective. But again, there is variance between lenders.
How much can you borrow?
So how can you find out exactly what you can borrow? Well one way is to use affordability calculators on lenders’ websites, but remember that these are really stripped down versions of the ones the underwriters use. It’s crucial to note that with these calculators, the number you get out the other side is only as good as the information you put in to the front end. So if you don’t know exactly how that lender’s going to treat that income, if you don’t know if the lender is going to deduct your pension payment on your payslip for example, then the figure that you’re going to get at the other side isn’t going to be 100% accurate. The same goes for the generic calculators on some money sites where you’ll often find if you put figures in, it’ll just spit out a four and a half times or five times that number at the other end. It’s not really accurate.
When it comes to mortgages, seek advice
If you want a more accurate figure, you’ve got two options. You can either speak to a lender directly and run through their specific calculator with them guiding you on what figures to put in. Or you can speak to a financial advisor or mortgage broker who can give you an idea of what you can borrow based on their knowledge of all the lender’s calculators. Advisors and brokers understand who is going to take that pension payment, who’s not, who’s going to take more of the bonus etc. That knowledge can then be applied to your case to get the figures you need.
If you want more information download the Hudson Rose guide. There’s a budget planner in there as well so you can really get to grips with where your money goes each month and that’ll help when you’re having conversations with any lenders or financial advisors. If you want any advice or you want to run through what you can borrow, we’re more than happy just to have a chat to you, even if it’s the early stages, so do get in touch.