When buying a home, the first step is understanding how much you can afford. Most people want to buy as much property as they can afford, without being overstretched or with too little money to pay the monthly bills.
The basics of affordability
When thinking about how much you can afford to borrow with your mortgage, you need to take a number of factors and costs into account. The main affordability indicators involve asking:
How much money do you need a month for your living costs?
How confident are you that you won’t lose your job?
How much do you expect moving and any improvement costs to be?
What are your expectations in terms of house prices and mortgage rates – are they going up or down over time?
Are you happy being “house poor”, with a big house but little disposable cash? Or would you prefer a more modest house with more cash in your bank account?
What safety net do you have in terms of savings – or family support?
What is your appetite for risk? Some people like living close to the edge, while others need more reassurance. Appetite for risk is often linked to responsibility – single adults are often happier to take risks than couples with lots of children and grandparents to care for.
Understanding the above points will help you work out what additional costs you’ll incur when you move, think about how much money you need to maintain your desired lifestyle, and how comfortable you are to stretch yourself financially.
What is my overall budget?
The first step is to draw up your overall budget and understand how much money you have at your disposal to pay for everything. This will depend on the capital you have at your disposal, and how much you can borrow against the property as a mortgage.
The capital you have depends on:
What savings you have. If you are saving to buy, you may want to consider a Lifetime ISA
What support you get from your family (perhaps by them extending their mortgage). See our guide for parents on How to help your child buy a home
What capital you can raise from selling an existing home, or extending a mortgage on a property you are not selling
Any government support. See What help can I get from the government?
What unsecured loans you raise, for example credit card debts. We strongly recommend against this. If your move depends on building up credit card debts, you are over-stretching yourself
Once you’ve added these amounts together, you need to deduct any costs of buying, moving and improving, as well as the savings safety-net you want to keep (you will need to have some savings after you move, in case of emergencies). The final sum is the amount you have available as a deposit that you feel you can afford to put down towards the cost of your home.
How much can I afford to borrow?
Once you’ve calculated how big your deposit is, you’ll be able to work out how much you can afford to borrow.
The size of your mortgage will depend on:
The size of your deposit. There are an increasing number of 95% mortgages out there, but ideally your deposit would be at least 10% of the value of the property. Put simply, the bigger your deposit, the more you can borrow.
How much outstanding debt you have from other lenders (e.g. bank loans, credit card debts). To improve your chances of getting a mortgage, see our guide on how to improve your credit rating before getting a mortgage.
Your income. Some banks can lend up to five times salary, although these are maximum figures. Lenders all have slightly different ratios, taking into account joint incomes, bonuses etc.
The stability of your income. If you are freelance, have just set up a new business, or have unpredictable income, then mortgage lenders will usually only be prepared to offer you smaller mortgages
COVID-19 and affordability
Mortgage lenders warned the Bank of England as lockdown was lifted that the availability of mortgages, loans and other credit would reduce, despite greater demand from consumers.
As a result of the pandemic, lenders are also far stricter about what income they will take into account when deciding how much homebuyers can borrow.
Many will no longer consider bonuses, overtime or furlough money, and are demanding extra paperwork such as proof of job security from employers.
The biggest hurdle for first time buyers at the moment is the retraction of the 95% mortgage. According to an analysis by Moneyfacts.co.uk, in August 2020 there were currently just 20 mortgages available for buyers with the smallest deposits of 5%. This represents a 95% drop since the start of the coronavirus crisis.
The availability of mortgages up to 90% LTV and beyond also remains extremely limited.
What should I do if the lender refuses to give me a big enough mortgage?
If various lenders reject your application, it’s a sign that they don’t think you can afford such a big mortgage. Should this be the case, it’s best to scale down your aspirations rather than desperately search for the one lender that will say yes.
This may be frustrating, but it’s in your best interests to ensure that you’re not financially overstretched because you don’t want to have your home repossessed in the future.
How much will the total cost of buying my home be?
There are other costs involved with buying a house that you need to make sure you can afford. They include:
The total purchase cost. On top of the house price, you may have to pay for Stamp Duty, conveyancing fees, surveying, mortgage fees etc, which can all add up to 7% onto the house price.
Don’t forget the estate agent fees you have to pay if you are selling your existing home
The hidden costs of buying and owning a home. This isn’t just the moving van, but new bed, fridge etc. On average, home movers spend £5,000 on new goods. You need to factor this in if you are not keen to sleep on the floor until you have saved up for a bed.
The cost of building works. What are the emergency works you have to do that can’t be put off – such as getting the boiler to work?
So, how much can I afford to borrow?
You should have calculated out how much capital you have to play with and how much you can borrow from a mortgage lender (both being your total home-buying budget) – and to state the obvious, that needs to cover the total cost of buying your home. If not, scale back your ambitions – or find some more money. But being able to afford to buy your new home is only the first step – to avoid repossession or mounting debts, you need to be able to afford to live in it.
Will I be able to afford to pay my mortgage and other household bills?
Once you have decided the rough size of the mortgage you are going for, you should find out what the rough monthly costs would be, which will depend on the type of mortgage. It’s important to ask yourself:
Is the monthly mortgage a payment you can easily afford? A good rule of thumb is that no more than 35 per cent of post-tax income should go on mortgage payments.
Will the mortgage be more or less than your current rent? If it you are struggling to pay your rent, and the mortgage is more – think again
Will there be bills – such as council tax, water or insurance – that you are currently not paying? These can add up to thousands of pounds a year (out of your post-tax income)
What happens if interest rates go up, by 1, 2 or 3%? You need to stress test the mortgage for different scenarios. If you can’t afford an increase in interest rates, you need to get a fixed rate mortgage, which will normally increase your monthly mortgage costs
What happens if you lose your job, or suffer a fall in income because you have children and go on maternity leave? If you are planning kids, you can’t plan on the basis of dual-income-no-kids lifestyle
Can you cover the basic maintenance costs of a house? Many new homeowners struggle to pay the always surprisingly large wear and repair costs that go with owning a home (but not renting one)