What is mortgage affordability and how to improve yours?

You might hear lenders like high street banks talk about mortgage affordability when you start looking to buy your first home. But what does it actually mean, how does it impact what you can borrow for a mortgage, and how do you improve your affordability? We spoke to our partners at Tembo to find out more.

What is mortgage affordability?

First things first, what is mortgage affordability? Mortgage affordability is a measure of how much you could comfortably repay a mortgage each month alongside your normal expenses like household bills, childcare and groceries, as well as existing debts or loans.

What is mortgage affordability used for?

Mortgage affordability is used by lenders to determine how much you could afford to borrow for a mortgage. They are lending you the cash to buy a house, so they want to make sure you will be able to repay the loan even if money gets a bit stretched. This is why you cannot just borrow as much money as you want - you have to be able to afford the loan you take out.

What do lenders look at when doing an affordability check?

There are a couple of things lenders look at when conducting an affordability assessment - these are factors which impact how much you could afford to borrow, and how risky you are as a borrower. Income multiples Typically, lenders will work out the maximum mortgage amount they could offer you by multiplying your income by a set amount. This is called an income multiple. Most lenders will allow you to borrow 4-4.5 times your total household income with a standard residential mortgage. So if you and your partner collectively earn £50,000, you could be offered a mortgage up to £225,000. Note that this simple calculation can be reduced by your expenditure, credit history and debts, which we’ll cover off shortly. Often, a traditional mortgage isn’t enough to get the home you want, so it’s worth looking into other ways to boost your buying budget. This could include using a guarantor mortgage or family support scheme to boost what you can borrow, or put down a larger deposit. Or you could explore other buying schemes like 5.5x Income Mortgages for higher earners, or Professional Mortgages for doctors, nurses, solicitors and other professionals to increase your mortgage size. Income and outgoings Next, your lender will assess your earnings and spending to work out if you can afford the mortgage. They’ll look at how much income you have coming in each month, as well as benefits such as child and working tax credit, pension and any other income sources like rent from buy-to-let properties. It’s worth noting that while bonuses, commissions and overtime can boost your overall earnings, because these are not consistent lenders can disregard these income sources or only accept a percentage of the total, e.g. 50% of commission. When looking at your outgoings, they’ll take into account bills, phone contracts, subscriptions like Netflix, childcare, groceries as well as money spent on socialising, holidays and any hobbies or splurges. Stress testing Next is the lender’s stress test. This is to make sure you could afford to repay your mortgage if interest rates rose. What this does is ensure that if the mortgage market rapidly changes, you’ll still be able to make your repayments each month. Typically lenders stress test with a 3% rise, but some mortgage lenders do not stress test to such a high level if you fix your interest rate for five years or longer, as it is seen to reduce the risk for the borrower. Debt vs Income The last puzzle piece is working out your Debt To Income ratio (DTI). Lenders want to make sure you have a low debt to income ratio to ensure you are not taking on too much debt. To work out debt-to-income, you take the total debt you have - for example, the amount on credit cards, personal loans, car finance etc - then divide that by your annual salary and multiply by 100. As a rule of thumb, most lenders would need you to have a DTI of 30% or less to be accepted for a mortgage. If your DTI is up to 40%, you may be offered a mortgage but for a smaller amount. A DTI of 50% or more and lenders will consider you to be a high risk borrower, meaning you may have a smaller choice of lenders willing to lend to you. Plus the mortgage interest rates you may be ordered are likely to be higher, which would make your monthly repayments more expensive.

How to improve your mortgage affordability

If you find that you cannot get the mortgage you need, it’s worth looking into ways to improve your affordability. If you know that your credit score or debt-to-income ratio is what’s limiting your affordability, look at ways to improve them. This could include reducing the amount of debt you have and ensuring you pay any loans back on time to show you are proficient at handling debt. It may be worth reviewing your spending habits to look for ways to reduce your outgoings if lenders are concerned that you cannot afford the monthly repayments. When assessing your affordability, lenders will look at the last few months’ worth of bank statements, so you will need to change your spending over a couple of months to demonstrate better budgeting. If the mortgage size you are offered isn’t enough to get you on the ladder, look into ways to increase the amount you can borrow. This could be through a buying scheme that uses a guarantor, or reduce the amount you need by buying a share of a home instead through a Shared Ownership scheme. To save you time, work with a specialist mortgage broker like Tembo who are experts in increasing buyers’ mortgage affordability. In fact, on average their customers boost their buying budget by £82,000. With access to over 20,000 and over 100 mortgage lenders, they’ll be able to find all the ways you could boost your budget from across the market.