Money Advice Service

Before applying for a mortgage, you need to think about more than just whether you can afford the monthly repayments. Mortgage providers will look at your income and outgoings to see if you can keep up with repayments if interest rates rise or your circumstances change. Learn more about how lenders assess how much you can borrow.

How lenders assess what you can afford

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 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.

Use our Mortgage calculator, to help you work out how much your monthly payments would be if interest rates rose in the future.

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
  • taking a career break.

If the lender thinks you won’t be able to afford your mortgage payments in these circumstances, they might limit how much you can borrow.

Comparison websites are a good starting point for anyone trying to find a mortgage tailored to their needs.

We recommend the following mortgage comparison websites:

Remember:

  • Comparison websites won’t all give you the same results, so make sure you use more than one site before making a decision.
  • It’s also important to do some research into the type of product and features you need before making a purchase or changing supplier.
  • Find out more in our guide to comparison sites.

What the lender takes into account

When working out how much you can afford to borrow, the lender will look at:

1. Your income

  • your basic income
  • income from your pension or investments
  • income in the form of child maintenance and financial support from ex-spouses
  • any other earnings you have – for example, from overtime, commission or bonus payments or a second job or freelance work.

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
  • maintenance payments
  • insurance - building, contents, travel, pet, life, etc
  • any other loans or credit agreements you might have
  • bills such as water, gas, electricity, phone, broadband.

The lender might ask for estimates of your 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 impact

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.

For a full list of the information you might need to prepare, read our paperwork checklist.

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 read our guides Help to Buy and other housing schemes; Scotland – Home buying schemes

Our Mortgage affordability calculator 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.

Also, use our Mortgage calculator, which can help you find out how much your 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.

Read our guide to find out more about how mortgage interest rates work.

Your next step

Find more information on Estimating your overall cost of buying a house and moving

This article is provided by the Money Advice Service.