A beginners’ guide to home loan affordability…
In days gone by, the amount you could borrow from a lender was calculated by a simple calculation known as loan-to-income ratio – it might have been between three and five times your salary or 2.5 times the joint income of a couple.
These days, this is often capped at 4.0 times your income, although in some instances, lenders will still consider up to five times.
Not only that but a lender will calculate how much you can actually afford to borrow based on your monthly outgoings – this means they will look at any financial commitments you have, such as credit card repayments, car finance, childcare and maintenance, and general living expenses. They also need to ‘stress test’ to take into account potential increases in interest rates.
What is included in your income
As well as a wage or salary from a permanent job, you can include investment and pension income, spousal support and child maintenance payments from ex-partners and other earnings such as overtime, bonuses or freelance work.
Those that are self employed or Directors of their own company will normally be assessed on their taxable income.
What’s included in the outgoings
These will include maintenance payments, credit card payments, insurance costs such as your house and car – even pets – repayments on loans and credit agreements, like a car or a sofa, and bills including gas, electricity, broadband and phone.
It’s also wise to build in a buffer of your own – if you can build up savings of around three months of your income, that will help should the worst happen, and allows you a bit of breathing space without worrying about losing your home.
Whilst there are online calculators that will estimate how much you may be able to borrow and how much you can afford, there can be a significant difference in the ability to borrow between lenders, so the best thing is to get advice from an experienced and knowledgeable independent financial adviser.
If you would like to discuss arranging a mortgage, please feel free to contact us here at J Finance Ltd for independent and unbiased advice.
Established in Berkshire in 2004, J Finance Ltd is one of the leading financial planning companies in the area. We serve clients across the South of England including Oxfordshire, Buckinghamshire and Hampshire. If you would like to discuss this subject or any other financial matter, without obligation, please contact us on 01635 521 300 or firstname.lastname@example.org.
YOUR MORTGAGE IS SECURED ON YOUR HOME. THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.