Successful mortgages are often a balancing act of borrowing enough to afford the home you want while still ensuring that the monthly payments are affordable. Mortgage lenders will look at your income and outgoings to ensure that you’ll be able to keep up with the repayments and interest, even if your circumstances change or interest rates increase.

Generally, lenders work out the maximum amount you could borrow based on your annual income or salary. But a deeper understanding of how lenders calculate mortgage affordability will help you know what you can do to improve your chances of being approved for a better mortgage. Here, we’ll look at mortgage affordability and mortgage amounts in more detail so you can understand how much you could borrow for a mortgage based on your circumstances.

What Does Mortgage Affordability Mean?

Mortgage affordability essentially means what you can afford to borrow on your mortgage. In the UK, the Financial Conduct Authority (FCA) requires lenders to assess whether borrowers can afford to repay the mortgage they’re applying for. Mortgage lenders must carry out a mortgage affordability assessment in which they consider your income, spending and debts.

Getting a mortgage where you can’t afford the repayments can have serious consequences. You may risk losing your home and the damage caused to your finances and credit report can be difficult to repair. These potential negative consequences are why the affordability assessment is so thorough and rigorous. Falling behind on your mortgage repayments has greater risks than getting behind on rent.

How Is Mortgage Affordability Calculated?

In the UK mortgage affordability rules and criteria will vary from lender to lender. Nonetheless, all lenders will look at certain factors when conducting their mortgage affordability checks.

Income

Lenders will look at your income - including your basic income from employment, any income you receive from investments or pensions, and any other earnings such as commission, bonuses, overtime or freelance work, or a second job. Lenders will also consider any income you receive through financial support or child maintenance from ex-spouses. Lenders will ask you to provide bank statements and payslips to evidence your income. If you’re self-employed, you’ll need to provide the lender with your business accounts, bank statements and 1 - 3 years of tax returns.

Loan-to-Income Ratio

The loan-to-income ratio is the amount you want to borrow on your mortgage divided by the amount you earn. The maximum mortgage amount you can borrow is typically capped at 4.5x your annual income.

Loan-to-Value

Lenders will also base their mortgage decisions on LTV (loan-to-value). This is affected by the mortgage deposit you put towards purchasing the property. A larger deposit improves affordability as it decreases the amount you need to borrow on a mortgage to afford the property you want. The minimum deposit required by most lenders is 5% - 10%.

Your Outgoings

Lenders will also assess your ongoing commitments, such as car finance, hire purchases, child maintenance and monthly loan payments. With credit cards, lenders usually consider what's owed as a percentage of the outstanding debt. They will assume you’re making a monthly repayment of a certain percentage towards the balance and will use that figure as part of your affordability assessment.

Your Future Circumstances

Lenders will also consider your ability to pay the mortgage in the future, taking into account potential changes to your circumstances, such as having a baby, redundancy, or taking a career break. If the lender believes you cannot afford your repayments in the future because of these circumstances, they may limit how much they will lend you.

What Credit Checks Do Lenders Perform Before Approving a Mortgage?

Mortgage lenders will carry out credit checks of your credit history to determine your credit worthiness, looking at how responsible you are with keeping up your repayments. Any late, missed, or failed repayments on your utilities or credit agreements, such as for loans or credit cards, or a history of CCJs (county court judgments), IVAs (individual voluntary arrangements), or bankruptcy will negatively impact your credit score. Lenders who perceive you as posing a higher lending risk may require you to put down a larger mortgage deposit, charge you a higher interest rate or decline your mortgage application altogether.

What Should I Do Before I Apply for a Mortgage?

Before applying for a mortgage, it’s a good idea to get a report from at least one of the main credit reference agencies. You’ll be able to see how a potential lender may perceive you, correct any errors on your credit report and catch up on any missed credit payments. Use the time before applying for a mortgage to close any accounts you don’t need, pay off debts, reduce spending and even see if a pay rise is a possibility. These steps will help you improve your borrowing power and mortgage affordability.

What Mortgage Can I Afford?

If you're wondering, "how much mortgage can I afford?", it's important to remember that every lender has their own criteria for assessing affordability in the UK. You’ll find that some lenders may offer you more than others. As a general rule of thumb, most people can expect to borrow up to 4 - 4.5x their annual income. If you have a decent sized deposit and an excellent credit record, you may even be able to find a lender willing to let you borrow up to 5x your income.

Here's an example of what these income multiples look like with regards to a mortgage:

  • Your salary is £30,000, you could borrow:
    • £120,000 at 4x your salary
    • £135,000 at 4.5x your salary
    • £150,000 at 5x your salary

Buying a home with another person usually means the affordability assessment is based on your combined annual income. Therefore if you both earn £30,000, you may be able to get a mortgage of between £240,000 and £300,000.

A quick and easy way to find out how much you can borrow is by using our mortgage borrowing calculator. You just need to input how much you earn and your monthly outgoings, and it will estimate how much you can afford to borrow. There’s also our useful mortgage repayments calculator to find out how much your monthly loan repayments might be.

John Charcol is an independent, expert mortgage broker who will guide you through what you can expect to borrow before you approach a lender. We’ll be able to advise you on your mortgage affordability based on our extensive market experience and knowledge of lenders’ mortgage criteria.

What Factors Impact Mortgage Affordability?

While your income is typically the largest factor in a mortgage affordability assessment, several other factors can also affect affordability.

Current Debts

If you have many debts, this can reduce the mortgage amount you can borrow and the deals available to you. Debts are typically large if your monthly repayments are more than 50% of your monthly income. In this situation, you may find paying off some debt before applying for a mortgage will give you access to better deals.

Expenses

Similarly, you may not be able to borrow as much as you’d like if you have high monthly expenditures. Lenders will want to see how much you spend on your regular bills, food, childcare, travel, clothing, leisure and household essentials. It’s a good idea to limit unnecessary spending at least 6 months before applying for a mortgage.

Credit History

The better your credit history, the more lenders and deals you’ll be able to access. Some lenders may be more cautious to lend near your maximum borrowing amount or even automatically decline your application if you have had more serious issues, such as an IVA, a CCJ, or bankruptcy. If you have poor credit, a mortgage broker like John Charcol can help you find a bad credit mortgage.

Employment Status

Whether your employed or self-employed won’t affect the maximum income multiple a lender will offer you. If your self-employed income varies significantly from year to year, it may affect affordability. For instance, if your income was £40,000 this year but £20,000 the previous year, not all lenders will approve a mortgage of 4x this year’s income. They may instead use the lower figure or an average income amount. It’s worth speaking to one of our experts at John Charcol as we have access to a range of lenders who will look at forecast income or accountants’ references, enabling them to consider you for a mortgage at a higher income multiple.

Loan-to-Value

Your LTV (loan-to-value) is the percentage your mortgage makes up of the property’s purchase price. For instance, a £180,000 mortgage on a £200,000 property has a 90% LTV and a 10% deposit. Some lenders will offer lower rates or even consider lending at higher income multiples for mortgages with lower LTVs - such as those under 85%. Since it’s common for many first-time buyers to put forward smaller deposits of 5% - 10%, they may find they don’t have access to quite the same deals as those with bigger deposits such as home movers.

Occupation

Some lenders will offer higher income multiple mortgages to borrowers in certain professions, such as lawyers, doctors and accountants. However, these buyers often need to be in a certain age bracket, such as 25 - 40.

How Far Back Do Lenders Go When Checking Mortgage Affordability?

While it varies depending on the lender, most will ask for bank statements for the past 3 - 6 months and use these to assess your mortgage application. If you’re a self-employed sole trader, the lender may ask you to provide up to 2 years of self-assessments. If you’re a director of a limited company, the lender will require the last 2 years of self-assessments to show your salary and dividends drawings as well as 2 years of the limited company’s accounts.

Will My Poor Credit History Affect Mortgage Affordability?

Getting approved for a mortgage is possible when you have poor credit, but it can be more challenging. Lenders will review your credit score and a poor credit rating may limit your borrowing options. Some lenders offer mortgages for people with bad credit, but you’ll likely have to pay higher fees and interest rates or even put down a larger deposit.

If your mortgage application is declined due to bad credit, it’s a good idea to focus on building up your credit score before you reapply. Whether you’re a first-time buyer, moving home or looking to remortgage, this will improve your chances of being approved next time. The 3 main credit reference agencies in the UK holding credit reports are Experian, Equifax and TransUnion. The information held by each agency can vary, along with their scoring criteria, so it’s a good idea to check all 3 to get a full picture of how lenders may perceive you.

Is Mortgage Affordability the Same for Remortgaging?

As with a standard residential mortgage, remortgage affordability is based on your income and outgoings. If you choose to remortgage with a new lender, you’ll need to pass the affordability assessments of the new lender. Lenders will also consider any early repayment charges as part of your affordability assessment.

Lenders will look at your ability to afford the mortgage based on your circumstances. This means the deals available to you now may be different that what you took our originally when you bought the property. That’s why it’s helpful to speak to an expert mortgage broker like John Charcol about all the remortgage options available.

What About Mortgage Affordability for Buy-to-Let Mortgages?

Buy-to-let mortgages are assessed a little differently in terms of affordability than standard residential mortgages. As you’ll likely be using the rental income you receive from the property to meet your monthly payments rather than your personal income, lenders will assess your mortgage application based on this instead.

It’s common for buy-to-let mortgages to be interest-only, which means you only pay the interest on the loan each month, and the total loan amount is repaid in full at the end of the mortgage term. As interest-only payments are lower than capital repayments, it’s usually easier to pass lenders’ meet the lender’s ICR (interest cover ratio) calculations compared to repayment mortgage affordability calculations.

What Can I Do to Improve My Affordability for a Mortgage?

There are certain things you can do to improve your mortgage affordability, including the below.

Consider the Mortgage Amount

Your LTV will contribute to which mortgage deals that are available to you. This measures the proportion of the loan you're borrowing against the property’s value. Mortgage deals with higher LTVs typically have higher interest rates and result in you paying back more overall. If you reduce the total amount you borrow, you can lower the LTV and improve your affordability in terms of interest rate and total repayment cost.

Review Your Spending

The lender will review your financial history and monthly financial position when assessing your mortgage affordability. Keep this in mind during the months leading up to submitting your application and work on managing your finances successfully.

My Mortgage Application Was Declined on Affordability – What Can I Do?

If you’ve been declined a mortgage on the grounds of affordability, speak to an independent mortgage broker such as John Charcol who can help you get your next application approved. It’s best to do this rather than simply try again on your own, as too many mortgage applications and rejections can negatively impact your lending appeal. A specialist mortgage broker can match you with a lender that best suits your circumstances, enabling you to reapply confidently, knowing that you better align with the new lender’s eligibility and affordability criteria.

Summing Up

Understanding how mortgage lenders calculate affordability can help you find the best deal and increase your chances of being approved. At John Charcol, our team of expert mortgage brokers is here to guide you every step of the way and help you get the best possible mortgage for your situation. Get in touch with us today to learn more about mortgage affordability and how we can help you secure the mortgage you need.

More Mortgage Affordability Resources

Mortgage Affordability Checks

What mortgage affordability checks do lenders carry out when you apply for a mortgage? Find out what lenders consider depending on your situation here.

How to Get Quick Mortgage Approval

Need quick mortgage approval? Learn how quickly you can get a mortgage or bridging approved depending on your circumstances and what a fast-track mortgage is here.

Mortgage Agreement in Principle

What is a mortgage Agreement in Approval? Find out in our guide. We explain how they work, how to secure one, how long an Agreement in Principle lasts and more.

Mortgage Income Multiples

Here we explain mortgage income multiples – how they work, how impact what you can borrow, whether you can borrow up to 5 times your income and more.

Remortgage Due to Affordability

Can’t remortgage due to affordability? Here we explain why a lender might reject an application, what affordability checks there are, your options and more.

Getting a Mortgage of 4 to 5 Times Your Salary

Can you get a mortgage of 4 – 4.5 times your salary? In fact, many lenders work out your max borrowing using this income multiple. Learn how it all works here.

Mortgage Declined After AIP

Had a mortgage declined after AIP (Agreement in Principle)? We explain how often this happens, why a mortgage may be declined, your options & more.

Mortgage Affordability for Second Homes

How do lenders assess mortgage affordability for second homes? Here we go through what lenders consider, the rules around buying a second home & more.

Mortgage Declined After Exchange

Can a mortgage be declined after exchange? It is possible but highly unlikely. We go through why this could happen and what your options are.

Mortgage Declined After Valuation

Had a mortgage declined after valuation? Here we explain what a property valuation is, why a mortgage may be declined after valuation and what you can do.

What Mortgage Can You Get on Your Salary?

Want to know what mortgage you can get on your salary? Here we explain what you can borrow based on your salary, what income lenders consider & more.

Mortgage Declined on Affordability

Had a mortgage declined on affordability? Here we go through why this might happen, what lenders consider and your next steps are when this happens.

Mortgage Offer Withdrawn

Had a mortgage offer withdrawn? Find out what you need to know here. We go through why and when this would happen, as well as your options and next steps.

Single Parent Mortgages

Can you get single parent mortgages? Yes you can get a mortgage as a single parent. It’s like getting a mortgage as a sole borrower. Find out more here.

Buy-to-Let Mortgage Eligibility Criteria

What buy-to-let mortgage eligibility criteria do you need to meet? Find out here. We go through rental income stress tests, deposit requirements and more.

£400,000 Mortgages

Looking for a £400,000 mortgage? Here’s everything you need to know about whose eligible, the criteria you need to meet, the costs, the deals available & more.

£500,000 Mortgages

Looking for a £500,000 mortgage? Here’s everything you need to know about eligibility requirements, lender criteria, mortgage repayments & more.

Getting a Mortgage Based on 6 Times Salary

Want a mortgage based on 6 times salary? Find out when this is possible, who can borrow at 6 times income, how to improve your borrowing power and more.

Mortgage Repayments Guide

Learn all about mortgage repayments in our guide. Here we explain how they’re calculated, what lenders consider, how overpayments and ERCs work and more.

Mortgage Based on 7 Times Salary

You can’t typically get a mortgage based on 7 times salary or income. However higher earners can get a mortgage at 6 times income. Find out more here.

Repayments on a £100,000 Mortgage

Want to know the repayments on a £100,000 mortgage? Find examples as well as information on how mortgage repayments work, what impacts them and more here.

Million Pound Mortgage

Looking for a 1 million pound mortgage or a mortgage on a 1 million pound house? Learn about options here. We go through lenders, criteria, repayments & more.

Had a Mortgage Declined? What Is Next?

What should you do if you have a mortgage declined? Here we go through why mortgages are declined & tips to improve your chance of success next time you apply.

Repayments on a £200,000 Mortgage

What are the repayments on a £200,000 mortgage? Find information on the overall and monthly cost of a £200,000 mortgage as well as how to access lower payments.

Repayments on a £150,000 Mortgage

Learn about the interest & capital repayments on a £150,000 mortgage, what they could look like for you, how to secure a great deal & more.

Repayments on a £300,000 Mortgage

Could you afford the repayments on a £300,000 mortgage? Learn what makes you eligible for a £300,000, what impacts the mortgage payments and more in our guide.

Tier 2 Visa Mortgages

Can you get Tier 2 Visa mortgages? And what are the mortgage visa requirements and lender criteria in the UK? Learn everything you need to know here.

Getting A Mortgage Based On 5 Times Salary

Want a mortgage based on 5 times salary or income? Find out when this is an option in our guide. We go through how it works, lenders and the criteria and more.

Mortgage Application Process UK

What’s the mortgage application process in the UK? Here we go through preparing before you submit an application, what to expect, how a broker can help and more.

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