Starting out on the property ladder and wondering what house you can afford?
This short guide will highlight the key factors which will allow you to determine the price, type and size of house you are able to afford.
- How much mortgage can I afford
- Pre planning
- Mortgage v rent
- I can afford a property, should I buy it?
- Individual or partnership
- What house can I afford?
- Common questions
How Much Mortgage Can I Afford/How Much Can I Borrow?
It is common for lenders to offer between 60-75% LTV* (loan to value) as a mortgage, however some specialist lenders will offer higher LTV amounts.
First time buyers are able to secure mortgages with only a 5% deposit (95% LTV).
*LTV is the amount of money a mortgage provider will lend against a property compared to its value. For example, a 75% LTV on a £100,000 property would equal a mortgage/loan of £75,000.
Lenders will use various information in order to determine the maximum loan amount they are able to provide you, along with the mortgage rate, repayment amounts and terms.
Current mortgage lenders will ensure that you are able to keep up with repayments if interest rates were to rise, also known as mortgage stress tests.
However, you should also exercise due diligence on your own behalf – If you don’t keep up with repayments, your home could be repossessed, leaving you homeless.
An initial stage of determining what house you can afford is to calculate the sum of money you are able to save each month.
Using the simple equation below, you can determine the total amount of money you are able to save each month.
Be sure to include absolutely every outgoing into the equation, from insurance payments to toothpaste.
Total income – total outgoings = available funds p/m.
A point to note however – The sum calculated above should not be spent in its entirety on a house.
i.e. You should put aside around 60% of your available funds each month in case of emergencies, as savings or as a holiday fund, etc.
So, in order to have a more accurate figure of the sum you are able to spend on a property each month, you’ll need to calculate ~40% of the available savings from above.
( Total income – total outgoings ) * 0.4 = Available funds p/m.
Mortgaged or Renting - Which is More Affordable?
When searching for your next property, you should consider whether you will purchase the house with a mortgage or continue renting.
Both options have their advantages;
While renting may be slightly higher than a mortgage payment each month, it has the advantage of being a short contract basis – if you find yourself struggling to make ends meet, you have the option of downsizing at the end of the contract.
Renting a property also allows you to move around often – if you start renting a new property but find that you’d prefer to live somewhere else, or move jobs to a new location, the end of the tenancy agreement will soon be upon you, allowing you to find a new home.
The two advantages mentioned above are not available with a mortgage.
It is commonplace for a mortgage contract to be upwards of 25 years, which means once the contracts are signed, you are tied in for an extensive period of time.
This can make it difficult if you run into financial difficulty – especially if you don’t make repayments. Selling a property can take enough time as it is, but factor in unpaid debts and you could be waiting a while for a buyer to become interested.
However, mortgages can be slightly cheaper each month compared to renting, provided you don’t sign a mortgage contract with excessive interest rates.
Further to this, a mortgage is favored by many as you will more or less own your own home – allowing you to do whatever you want without the permission of a landlord – but within reason.
To Summarize This Section:
Renting – Slightly higher payment each month but not tied in for extensive period of time and you don’t own the property.
Mortgaged – Slightly lower monthly payment compared to renting, however tied in for an extensive period of time. You own the property.
I Can Afford The Property I'm Interested in. Should I Buy it?
Just because you can afford a mortgage now doesn’t mean you will be able to in the future.
Take a worst case scenario;
If you were to sign a mortgage contract today and lose your job in 5 months time, would you be able to keep up with repayments?
Ensure that you have significant backup savings, or more than one stream of income to protect yourself from worst case scenarios.
Another point to note – Could you find a lower priced or smaller property to purchase? As this will lower your monthly mortgage repayments, allowing you to save and/or invest all of your extra savings for the future.
Individual or Partnership?
If you are purchasing a property as a couple, you have a significant advantage of two incomes (potentially), which can allow you to secure a higher mortgage and in turn a larger property.
If you are purchasing a property by yourself, but are slightly anxious or apprehensive about doing so, there are other options available to you such as shared ownership schemes.
It is highly recommended that you discuss your options an adviser.
An adviser will ensure that you receive the optimum mortgage which suits your requirements whilst also ensuring that you are completely aware of the long-term financial commitment that a mortgage has.
Property Types - What House Can I Afford?
The type, size and price of the house you can afford is completely dependent on the mortgage LTV amount you are able to secure.
However, we can provide a few general examples;
With a gross income of £1500 per month, taking into consideration that you should keep around 60% of your gross income for other investments/savings, this would leave you with £600 per month for a mortgage.
A £100,000 repayment mortgage with a term of 25 years, and at an interest rate of 3.5% would cost you just over £500 per month, which leaves you a little extra to put towards savings or a rainy day.
With a monthly gross income of £5000, saving 60% would leave £2000 per month available to spend on a mortgage.
In this scenario, you should consider leveraging your income and investing in a BTL (buy to let) property as well as a personal residence.
You could take the mortgage from example 1 for a personal residence and use the remaining ~£1500 on investment properties, which will provide you another source of monthly income.
Common Questions: How Much You Can Afford To Spend On A House
How Much Can I SPend on a House If I Make 60,000 a Year?
Your annual income each year obviously has an effect on the property you are able to afford.
However, if you earn 60,000 per year but have a lavish lifestyle and large bills/debts amounting to 40,000 per year, then it is clear you can only afford a safe amount of 15,000 per year, or just over 1000 per month on a mortgage.
Affordability does not only take your income into consideration – your outgoings are also considered during mortgage applications.
How Much Should You Spend on a House if You Make 100k a Year?
Similar to the question above, affordability is the key element when determining the amount you are able to spend on a house.
You should aim to save as much as possible from your annual salary to fund a deposit as this will lower your monthly mortgage payments.
How Much do I Need to Earn to Get a Mortgage of £150,000?
With standard mortgage repayments, a mortgage totalling £150,000 would equate to around £790 per month in repayments.
Ideally, you should be earning 40% higher than your repayment amount, which would mean you should be earning a monthly salary of around £1300
How Much do I Need to Earn to Get a Mortgage of £250,000?
With standard mortgage repayments, a mortgage totalling £250,000 would equate to around £1350 per month in repayments.
Ideally, you should be earning 40% higher than your repayment amount, which would mean you should be earning a monthly salary of around £2250.