It is important to work out a plan to know how what kind of mortgage payments you will be able to afford.
A rough guide to mortgage affordability is given by income ratios. For example, many banks will be reluctant to lend more than 4 times your annual income. Therefore, if you have an annual income of £30,000 a year, then the maximum mortgage loan may be £120,000.
However, income multiples only provide a rough guide to affordability. Many lenders now increasingly look at more factors to give a better view of how much you could afford.
Total Salary + perks – Monthly debt Payments (credit card, student loan, bank loan) – utility bills – necessary monthly outgoings = total disposable income which can be used for mortgage and other expenditure.
It is this disposable income after regular payments that is a key guide to affordability. Also issues such as how many children you have are important because children can be quite costly.
How To Be Able to Afford More.
If you are a first time buyer and want to be able to borrow more, it is worth looking at monthly outgoings and decide whether you can get rid of some.
Seek to reduce debt (especially those with highest interest first)
Cancel magazine subscriptions / gym membership. All these save on your monthly outgoings
Affordability and Type of Mortgage
Another factor that determines mortgage affordability is the type of mortgage that you take out. Some mortgage products will be able to reduce your monthly payments and so increase the affordability of a bigger mortgages. Tips to increase affordability include: