Mortgage Affordability Rule of Thumb
- 3 to 3.5 times income – meets affordability in nearly all lenders
- 4 to 4.5 times income – is maximum affordability with most lenders
- 4.6 to 5.0 times income – meets affordability in some cases with specific lenders
- 6 x salary mortgages – can be achieved for higher earners
As you might expect, enquirers often ask us to give them an affordability limit over the telephone. As you can see from the content below this is not a practical thing to do as each case must be investigated. Please note that where there are considerable current debts, car loans, student loans, pension contributions, large families, or short mortgage terms, the above rule of thumb is of little value
Mortgage Affordability – for example first-time buyers
- First-time buyers
- 10% deposit
- No dependents
- Some debt including student loans
- Incomes £31,000 and £28,000
Mortgage Affordability Highest
- Nationwide £280,300
- Halifax £280,250
Mortgage Affordability Generous
- Coventry £265,500
- Kensington £265,500
- Leeds Building Society £265,000
- Barclays £264,910
- Accord £264,910
- Virgin Money £264,910
- Platform £264,910
- Tipton and Coseley £264,900
Mortgage Affordability Good
- Santander £262,550
- Skipton – £261,500
- NatWest £250,700
Mortgage Affordability – for example home movers
- Family home movers
- 30% deposit
- 2 children
- Car loan and nursery fees
- Above average incomes £61,000 & £45,000
Mortgage Affordability Highest
Accord £475,590
Mortgage Affordability Generous
- Halifax £456,860
- Coventry £454,500
- Virgin Money £454,500
- Platform £453,490
- Tipton and Coseley £453,400
- Leeds £451,659
Mortgage Affordability Good
- Natwest £442,700
- Santander £440,024
- Nationwide £431,200
Lenders Affordability Calculators
- Accord Affordability Calculator
- Barclays Affordability Calculator
- Coventry Building Society Affordability Calculator
- Halifax Affordability Calculator
- Kensington Mortgages Affordability Calculator
- Leeds Building Society Affordability Calculator
- Natwest Affordability Calculator
- Nationwide Affordability Calculator
- Precise Affordability Calculator
- Santander Affordability Calculator
- Skipton Affordability Calculator
- Tipton and Coseley Affordability Calculator
- Virgin Money Affordability Calculator
Please note that many of these online mortgage affordability calculators are not as simple to complete as they first appear. Your mortgage Broker will be familiar with the complications and can give you an accurate assessment of your maximum mortgage lending
How do mortgage lenders calculate affordability?
As you would expect, mortgage lenders are interested in both your income and outgoings to calculate your mortgage affordability.
Mortgage Affordability and Income
Lenders are typically interested in pre-tax earned income. Some will also consider, pension or investment income, income from properties, or benefits income and tax credits.
Outgoings and Mortgage Affordability
When considering outgoings Lenders are primarily concerned with existing debt (credit cards and loans).
They are also interested in the number of dependents you have and specific costs such as child care and school fees.
Mortgage Affordability and Mortgage Term
Mortgage Terms can greatly affect mortgage affordability, clipping it heavily for terms under 25 years. Some lenders stretch a mortgage term to 30 years or beyond which can sometimes be beneficial for mortgage affordability calculations.
Other factors when assessing mortgage affordability
Loan to value and credit history can cause a Lender to adjust maximum affordability calculations.
Mortgage Lenders also run ‘stress tests’ on your affordability meaning, although you can afford the mortgage today, will you still be able to do so if mortgage rates rise? Sometime the selection of a 5-year fixed rate can assist affordability as it will eliminate the effect of stress testing.
Mortgage affordability and regulation
Since mortgages are regulated products, the Financial Conduct Authority needs to be comfortable with how each mortgage lender assesses mortgage affordability.
Therefore, each mortgage lender has made a submission to the Regulator outlining how they will assess mortgage affordability. For this reason, a mortgage lender is not in a position to make individual adjustments or allowances on a particular case.
Self-employed mortgage affordability
Mortgage affordability for the self-employed applicant is working out in a similar way to the employed applicant.
The key difference is how income is assessed for the self-employed.
Sole Traders
Income is based on the self employed income stated on your annual tax calculations. (In other words turnover less business costs).
Partnerships
As with Sole Traders income is based on the self-employed income stated on your annual tax calculations. (In other words your share of turnover less business costs).
Limited Company Directors
How Limited Company Directors are assessed for mortgage affordability depends very much on your share holding.
Typically a Company Director holding less than 25% of the business will be treated as if employed.
A Company Director with 25% of more of the business shares will be treated as self employed and income will be based and PAYE and Dividends.
Some Lenders can based income for Limited Company Directors on PAYE and Share of Net Profit.
Revenue and income for the self employed will vary from year to year and how your mortgage lender handling this effect can greatly influence your maximum affordability.
Most will average two or three years figures, some with work on your latest figures.
Contractor Mortgage Affordability
If you are a Contractor paid on a day rate there are Lenders that will consider your day rate to calculate your income rather than your Accounts. A typical Lender’s calculation for a Contractor would be.
Day rate X 5 X 46 weeks = income
Help to Buy Mortgage Affordability
Mortgage affordability on Help to Buy mortgage cases is working out in two elements.
Main mortgage
The affordability for the main mortgage lending is worked out by the Lender with allowance made for the cost of the Help to Buy Equity Loan.
Equity Loan Affordability
There is also an affordability calculation for the Help to Buy Equity Loan. The applicant needs to meet limits on this calculation as well as the main mortgage.
Separate affordability calculators are available for Help to Buy and London Help to Buy.
Under both schemes you cannot borrow more than 4.5 times the household income on your main mortgage.
Buy-to-Let Mortgage Affordability
Buy-to-let mortgage lenders will generally assess mortgage affordability based on rental income.
The Lender will want the rental income to exceed the mortgage payment by some margin. The margin required tends to vary depending on your tax status. Higher rates taxpayers need to meet a more aggressive calculation.
Margins and calculations vary and some Lenders are more generous than others. A typical calculation would expect the annual rent to calculate at least 145% of the mortgage interest based on a 5.5% rate.
This makes £1,000 per month of rent sufficient to support £159,000 of lending.
Buy-to-let top slicing
When the rental income does not meet the calculation for the lending required, some lenders will factor other income received by the applicants – this is known as top slicing.
Buy-to-let Portfolio Landlord
An applicant who will finish the mortgage transaction with 4 or more mortgaged buy-to-let properties is considered a portfolio landlord.
The regulator sets out additional affordability calculation requirements for a portfolio landlord and this can become very complex. Rent may be assessed against mortgage costs across individual properties as well as the portfolio. There will typically also be loan-to-value limits that must be met.