Have you had mortgage advice?
You can get advice directly from a lender who will discuss their own products. Read Choosing a mortgage for details of where to get advice.
In the past, mortgage lenders largely based the amount you could borrow mainly on a multiple of your income. This is known as the loan-to-income ratio. For example, if your annual income was £50,000, you might have been able to borrow three to five times this amount, giving you a mortgage of up to £250,000.
Now, when you apply for a mortgage, the lender will cap the loan-to-income ratio at four and a half times your income.
They must also assess what level of monthly payments you can afford, after taking into account various personal and living expenses as well as your income. This is called an affordability assessment.
These changes were brought into effect by the Financial Conduct Authority in 2014 after fully reviewing the mortgage market.
The lender must also look ahead and ‘stress test’ your ability to repay the mortgage. This takes into account the effect of possible interest rate rises and possible changes to your lifestyle, such as redundancy, having a baby or career break.
If the lender thinks that you won’t be able to afford your mortgage payments in these circumstances, they might limit how much you can borrow.
See also the Guidance Notes for applying for a mortgage, so that you make sure that you're in the best possible position to be accepted for a mortgage. You should not be disadvantaged because of your occupation.
Comparison websites are a good starting point for anyone trying to find a mortgage tailored to their needs.
Money fitness tip
Make sure you can afford your mortgage now and if things change. If you fail to keep up repayments you could lose your home.
We recommend the following websites for comparing mortgages:
- Comparison websites won’t all give you the same results, so make sure you use more than one site before making a decision.
- It is also important to do some research into the type of product and features you need before making a purchase or changing supplier.
What the lender takes into account
When working out how much you can afford to borrow, the lender will look at:
Money fitness tip
Use our HomeFinder to see whether you'd be in the running for a mortgage on your current income, savings and expenditure.
1 Your income
- Your basic income
- Any other earnings you have – for example, from overtime, commission or bonus payments or a second job or freelance work
- Income from your pension or investments, and
- Income in the form of child maintenance and financial support from ex-spouses
You will need to provide pay slips and bank statements as evidence of your income. If you’re self-employed you’ll need to provide:
- Bank statements
- Business accounts
- Details of the income tax you’ve paid.
2 Your outgoings
Check your credit report
It’s a good idea to check your credit report before applying for a mortgage. This will give you time to correct any mistakes in it and will notify you of any missed credit payments that could make the mortgage lender turn you down. Find out more on how to improve your credit rating.
- Credit card repayments
- Any other loans or credit agreements you may have
- Maintenance payments
- Bills such as water, gas, electricity, phone, broadband
- Insurance - buildings, contents, travel, pet, life etc
The lender might ask for estimates of your other living costs such as spending on clothes, basic recreation and childcare. They might also ask to see some recent bank statements to back up the figures you supply.
3 Future changes that might make an inpact
The lender will assess whether you'd be able to pay your mortgage if:
- Interest rates increased
- You or your partner lost their job
- You couldn’t work because of illness
- Your life changed, such as having a baby or a career break.
It’s important that you also think ahead and plan how you’d meet your payments. For example, you can help to protect yourself against unexpected drops in income by building up savings when you can. Try to make sure it contains enough for three months’ outgoings, including your mortgage payments.
How much can I borrow?
Small deposit or lower income?
If you only have a small deposit or are on a low income, there are schemes to help you get on the housing ladder. To find out more see Forces Help to Buy and Affordable housing schemes.
The Mortgage affordability calculator on the Money Advice Service's website, will show you how much a lender might offer you, and whether you'd be able to afford the monthly payments based on your income and outgoings.
You can also use the mortgage calculator on the Money Advice Service's wesbite, which can help you find out how much more monthly payments would be if interest rates rose in the future. You can also get ready for interest rate rises by thinking about remortgaging or overpaying.
Your next step
Estimate your buying and moving costs