Mortgage affordability simply means; how much can you borrow
It is a calculation that compares your income to your outgoings to see how much surplus funds you have left for your mortgage repayments.
Typically, the more debt you have the less you will be able to afford as lenders need to factor your monthly debt repayments into the overall affordability calculation.
The mortgage affordability test checks:
How much can I borrow - At its most basic level, this is based on a multiplier of your annual gross income. Our “how much can I borrow calculator” works on a 5x multiplier, which tends to be the norm. However, some lenders will only lend 4x gross income with one or two stretching to 6x.
The multiplier used is strongly influenced by your credit worthiness. If you have bad credit it is unlikely that a lender would lender 6x your gross income.
The lender will not only assess your income when deciding how much you can borrow. Other factors such as your age, the property type, size of your deposit, your credit history and your daily cost of living are all taken into account.
Can you repay the mortgage - Once the lender has calculated your net disposable income by taking your monthly expenses away from your income, they can then see what impact the monthly mortgage repayment is going to have on your finances.
Lenders don’t like the mortgage repayments to represent all of your net income. This would mean that once you had paid your monthly outgoings (utilities, child care, debt repayments, council tax, food, etc) your mortgage repayment would leave you with no funds.
To avoid this, lenders apply a percentage test to make sure the monthly mortgage repayments do not exceed their threshold.
This is why you should always use a Mortgage Broker. We will check your debt to income ratio and your monthly mortgage payment as a percentage of your disposable income as part of our service. We will then only approach lenders who are likely to accept you based on our assessment. This will give you a much greater chance of mortgage success.
As a rule of thumb, we would deem a mortgage repayment that represented 80% or more of your net disposable income to be a risk.