During a fact find meeting, regardless of whether you’re a first-time buyer or a home move, the all-important question you will ask us is; how much can we afford to borrow?
For the role of a mortgage adviser there’s two elements to this.
- There is a lender’s mortgage affordability calculator, which determines how much they can consider lending to you.
- Then there is a real-life budget planner, which is your lifestyle based on the property you’re buying or want to buy.
The general rule of thumb for mortgage borrowing is that lenders will consider lending up to 4.5x your income. There are lenders that will consider lending more but it can also be much less than this income multiple.
The affordability assessment determines exactly how much the lender can consider lending to you, taking into account;
- Personal details – such as age which can influence the length of the mortgage term
- Your level of income and the type of income e.g. employed vs self-employed
- The size of your deposit
- Financial Commitments – loans, credit cards, childcare, school fees
- Dependents – children or adult dependents
- Property related costs – service charge, ground rent, shared ownership rent
For your essential bills and even your lifestyle spending, many lenders affordability calculators use the Office of National Statistics Data (ONS) based on the makeup of your household e.g. what does the average 2 adults, 2 children household spend on all living costs.
However, not everyone lives the average lifestyle, and this is where we’re seeing many people really struggle with the cost-of-living crisis and the current interest rates which are much higher than what we have become accustomed to since 2012.
We help our clients go through a detailed budget planner looks at:
- Council Tax
- Internet, TV and Phone Bills
- Property Costs e.g. Service charge
- Insurances; home, car, phone, life insurances etc
- Loans / Car Finance / Credit Cards etc
- Supermarket Spending
- Petrol / Travel Expenses, inc tax and servicing costs
- Self-care – haircuts
- Health Related Expenses
Once we’ve accounted for these essential costs, we then look at what you currently spend / would like to spend on quality of living:
- Clothing & Footwear
- Entertainment / Social
- Pet’s food and insurance
- Christmas & Birthdays
- Hobbies and Subscriptions
- Beauty Treatment
In many cases the lenders ‘maximum borrowing’ isn’t affordable based on current interest rates and people’s current lifestyle which is often non-negotiable or in some cases their desired lifestyle.
This leaves you with 2 choices, lower your mortgage borrowing and purchase budget, or if possible, compromise on your quality of living for the home you want to buy.
Since October 2022 the housing market has been negatively impacted and one of the key factors is consumer affordability. People aren’t willing or able to spend the money they would have prior to this date.
We are seeing property fall in value, which can mean obtaining a smaller mortgage for the property you wish to buy and subsequently making mortgages more affordable.