When it comes to finding a mortgage, there’s a minefield of information to navigate. If you’re right at the start of your search, you might just be wondering ‘how much can I afford?’. So, we’re here to cut to the chase.
Our biggest piece of advice before we start? Be realistic about the repayments – you want to be able to afford them comfortably every month, not feel anxious about them. Bear this in mind when you’re doing your calculations. If you just want to work out what you can borrow, jump straight to our mortgage calculator below. For more tips, read on.
How do I work out how much I can afford to borrow?
Here it is, in easy(ish) steps. First you need to work out your spending and costs, and minus that from your income. Then there's your deposit and savings to factor in.
Work out how much you have to spend
How much money do you have – not just now but over the next few years? Here's what to think about:
1. Calculate your capital and savings
First work out how much capital/savings you have or can raise, and think carefully about whether you are willing to use up all of it on a deposit or would rather have a contingency fund – which we’d advise if you have no other back up, such as help from family. This will be your deposit.
The size of your mortgage – and your monthly repayments – will depend on the size of the deposit you can put down. The mortgage type you opt for – and that you’re – offered depends on all sorts of factors, from whether you’re self-employed to your own risk aversion. For example, there are 95 per cent mortgages available… but opting to put down a deposit that’s at least 10 per cent of the property’s value is a wiser choice.
2. Work out your monthly income
Look carefully at your salary. How stable is it? How stable is your job? Are you factoring in a chancy pay rise or bonus? Don’t – work only on guarantees. Some lenders will give you up to five times your salary. Ideally though, you don’t want your mortgage repayments to take more than a third of your salary after tax.
Work out your outgoings
This isn’t just at the time of moving – you need to do some investigation and thinking ahead so that you can work out what you realistically have left over at the end of each month to pay a mortgage.
1. Factor in unforeseen bills
Have you included bills that you’re not paying as a renter? Council tax, for example. What else haven't you considered?
2. Are you relying on credit cards?
Are you factoring in using credit cards to pay for essentials? If so, we’d advise strongly against it.
3. Will your circumstances change to affect your income?
Are you planning on having a family soon and how will this affect your joint or single income?
4. What do your monthly living costs amount to?
Add up your living costs per month, being really honest with yourself about where you can and can’t cut costs.
5. Have you factored in moving costs?
Add up the cost of moving – all the costs of moving house, from stamp duty to estate agents’ fees to paying for removals. These costs can come in at between 5 and 10 per cent of the overall property price.
6. Add in the costs of home improvements
Factor in the costs of improvements you might need to make, too. This is where it’s important to have a thorough survey done – or to take a trusted builder round the property with you. We’re not talking cosmetic revamps here – that’s always just a bonus. We’re talking roof repairs needed for those missing tiles; plumbing work to remedy that leak; a new boiler because the existing one is obviously on its last legs. If you are buying a do-er upper, it’s really worth getting some quotes up front so you know how much you may need to spend monthly on jobs that are absolute musts.
7. Are you in debt? What are they costing you per month?
Factor in debts – and work hard to reduce or eliminate them before you set about applying for a mortgage. They'll be an added burden and you might be refused a mortgage entirely if your finances are in a mess.
8. What are interest rates doing?
Consider external factors beyond your control: interest rates, for example. Are they predicted to rise soon, and how will this affect your repayments? Will you still be able to afford them? Will this make it more likely you go for a higher-rate, fixed rate mortgage?
How much can I afford to borrow?
Add together these costs, whether monthly bills or one-off lump sums, and you have your outgoings per month (or per year if you prefer). Deduct them from your monthly or annual income to find out how much you can afford for monthly repayments. Armed with this information and a good idea of your deposit value, you can work out what you can afford – and what a lender might be prepared to give you.
Now speak to a mortgage broker
Next you need to talk to a whole market independent mortgage advisor to see if your calculations match up to what you might get from a lender. We've teamed up with Habito, who will chat online with you, advising you on the next stages. They can help you assess affordability and give you impartial advice to ensure you get the best deal for you. Use their mortgage comparison calculator below, too, to find the best mortgage for you.