How much can I afford to borrow?

Whether you’re purchasing your first property or upgrading your current home, how much you can afford to borrow is the big question.

With the recent news that UK mortgage approvals have dropped to their lowest level in two years, the strict criteria that often accompany the mortgage application process are a worrying prospect for many would-be borrowers.

In response, the Bank of England (BoE) is currently in talks to change the way mortgage affordability works to deliver a vital boost to the market as This Is Money describes:

“The Bank of England is considering relaxing affordability checks borrowers must pass in order to take out a mortgage in a move that could further stoke house price inflation. Currently, borrowers applying for a mortgage – whatever the initial rate – will need to satisfy their lender that they could afford to pay a ‘reversion rate’.”

With such discussions in their early stages, getting the facts you need about how much you can afford to borrow under current rules remains a priority for prospective property buyers.

Lenders have their own rules when confirming mortgage affordability. There are however several factors you should consider when calculating the amount you can afford to borrow to take that step up or onto the property ladder.

Your income

How much you earn is a key consideration when applying for a mortgage. Lenders want to see that you can afford to make the monthly mortgage repayments you’re signing up for.

As a rule of thumb, many lenders in the UK allow you to borrow between 3 and 4.5 times your income. If you’re making a joint mortgage application, you can generally lend four times your combined income, or more with selected lenders.

As well as the amount of money you earn being scrutinised, the security of your job and any prospects for a decrease or increase (via pay rises) in your income will also be weighed up.

Your outgoings

Whether you’re renting or currently own a property, you should have a clear enough idea of how much your monthly outgoings equate to.

Go through your finances with a fine-tooth comb – prospective lenders will! Identify how much money you need not just for household bills but for your living costs. Are you prepared to change your lifestyle and cut some of your more expensive habits or hobbies to secure the extra funds you need to live in your new home?

Your ambitions

Many people are content with being ‘house poor’; this is when you own a sizeable house but have little disposable cash. Alternatively, you may want to opt for a more modest property and keep your purchase as risk- and debt-free as possible.

If you have your sights set on a project, however, considering how much you’ll be able to save from month to month when paying a mortgage and other household expenses is a must.

Moving costs money, and renovation or refurbishment costs much more. Devising rough moving and renovation budgets early will give you peace of mind not just during the mortgage application process but also when you search for your perfect project.

Access to savings or financial support from loved ones may free up the capital needed to enjoy a renovation project and live the life you want to lead. Alternatively, it could provide that all-important safety net to survive the trials and tribulations that often go hand-in-hand with the ‘doer upper’.

The market

The property sector and associated mortgage market experience peaks and troughs like any other industry. Keeping a close eye on house prices and mortgage rates will therefore stand you in good stead when determining how much you need to borrow and how much you can afford to lend.

For further advice and support with your mortgage, please contact us today.

Image: Tero Vesalainen / Shutterstock.com