How to work out what you can realistically afford on a house, whatever the market is doing.
Buying a house is a big step. It’s a long-term financial commitment and a decision you shouldn’t throw yourself into without much thought. And because of that, it’s essential to know what you can and can’t afford.
You don’t want to commit to a mortgage and then realise you’re too stretched to afford much else. It may sound obvious, but take the time to build your financial picture to understand how much you can spend on a house. If you’re a first-time buyer, your assets will be savings, investments and anything else you can turn into cash quickly. If you own the house you’re currently living in, that too will be an asset, even if you haven’t paid it off fully.
What factors determine how much I can afford to spend on a house?
In calculating affordability, lenders will look at:
- Monthly income. This is money you receive on a regular basis, such as your salary or income from investments. Your income helps to establish a baseline for what you can afford to pay every month.
- Cash reserves. This is the amount you have available for a deposit on a house and to cover the associated expenses of buying, such as stamp duty, solicitor fees, etc. You can use your savings, investments or other sources.
- Debt and expenses. Any monthly obligations you may have, such as credit card payments, car payments, student loans, utility bills, insurance, etc.
- Credit score. Your credit score and the amount of debt you owe influence a lender’s view of you as a borrower.
To quickly determine how much you can afford to spend on a new home, use the Budget Calculator. In just a few steps you can get an accurate figure of what you may be able to spend.
What can you afford per month
It’s not just a case of looking at your deposit and getting a mortgage. Lenders will consider:
- The x 4.5 rule: To avoid lending too much to people who can’t pay it back, lenders will generally only lend 4.5 times your annual income. This means you’ll be able to get a bigger mortgage if you’re buying with someone else, as you’ll combine your incomes.
- Your monthly spending habits: If you’re stretched towards the end of the month, every month, then lenders may see you as a risky choice. Mortgage underwriters don’t always look at your bank statements, but if they do, they often go back a few months, so make sure your spending is reigned in.
- Monthly mortgage payments: With the rise of mortgage interest rates, monthly mortgage payments may be steeper than before. A mortgage advisor will be able to help find the right rate to suit you. Bear in mind that the length of a mortgage term will have an impact. For example, getting a 30-year mortgage instead of a 20-year mortgage will lower your monthly payments, but you’ll pay more in interest over a longer term. Make sure that whatever mortgage you are accepted for is a workable monthly payment.
How much can I borrow?
There are lots of things you can consider when working out your home-buying budget. You can quickly crunch your budget using our Budget Calculator which helps you understand how much you can afford to spend on a new home.
Mainly, it comes down to gathering your financial figures and working with the right mortgage advisor who can steer you in the direction of the right mortgage deals. Get started by getting in touch with the mortgage advisors at Endpoint Mortgages who will answer your questions and scope out the best deals.
Then, once you have a budget in mind, you can let the home hunt commence!
Don’t risk losing your home. Your home may be repossessed if you do not keep up repayments on your mortgage. There may be a fee for mortgage advice.