The question here is not how much money you could borrow but how much you would be able to provide. Affordability is not just about how much money you yourself feel that that you can provide but how much money the mortgage lender feels you can provide.
Affordability can be a very subjective thing, what one person feels is affordable another may not. This in turn can present a problem for lenders in so much as how they estimate one persons ability to provide a mortgage against someone else’s ability to provide the same loan.
The one way that mortgage lenders have of getting around this problem is to devise their own system of affordability. This is not as daunting as it may first sound because each mortgage lender may have their own criteria and with that in mind it pays to see what is on offer from the individual mortgage lenders and what would suit you.
As an example, lets say a mortgage lender stipulates that you can borrow 3 times your yearly salary minus other loans you have accrued. To break this down simply take a yearly income of 20,000 with other monthly loans of 300. Your yearly loan is consequently 12 times 300 or 3,600.You subtract this from your yearly salary and the figure is 16,400. You then multiply this by 3 to ascertain what the mortgage lender is willing to loan you, a figure of 49,200.
Don’t worry if your income is this or less as all lenders are very different. Three times your income is a very conservative calculate nowadays. Most lenders will lend 4 times the amount and over and some will go to over 5 depending on their criteria and your circumstances. In some situations the lender will ignore current outgoings such as car loans and credit cards, unlike the case above, so it is worth while taking the time and attention to look for the lender with the criteria best appropriate to your individual circumstances. Shop around.
There is in addition another way that some mortgage lenders will estimate how much money they are prepared to lend you based on a totally different criteria. What they do is decide what percentage of your yearly income will be put aside for borrowing. As an example, say they decide that 40% of 20,000 income will be put aside for borrowing. That works out at 8,000 for an income of 20,000. They then deduct from this any other loans such as a car loan costing 300 a month or 3,600 a year. This leaves a figure of 4,400 a year or 367 per month which they reckon that you can provide to pay back each month.
Whilst no one can really tell how much a person can really provide these types of calculations are laid down to ensure there is a certain degree of responsible lending taking place. All lenders have to demonstrate to their regulators that they have not lent money irresponsibly.
These regulations are also there for your assistance. You want to be in a mortgage which you can provide comfortably to repay, not only now, but it the years ahead. What you may forget at the time of starting a mortgage is that economic climates change, interest rates fluctuate, and your mortgage repayments may change with that. For that reason you need to b able to provide your mortgage now, because if you can’t, how can you expect to be able to provide it in the future?
So when getting a mortgage it is always advisable to check your own affordability and make sure that any mortgage you position now is also affordable after a few percentage point rises come in. So if they haven’t already done it ask your mortgage adviser to quote you the same mortgage with a three percent rate increase in it and see how affordable it is then, if you find it nevertheless affordable then you should be safe to proceed.