Can you Afford a Mortgage?

Before buying a home, examine whether you can afford the cost of a mortgage. Here is a guide on how to check if lenders will accept your application and if you can be able to keep up with the repayments.

Check if you can afford a mortgage

To work out the amount you can afford to spend for a home, you need to consider:

  • Your outgoings
  • Your total income

Deduct your outgoings from your income to determine how much you can pay for a mortgage every month. You can then dodge getting one with repayments that you cannot afford.

You can determine how much you can spend on a home with the use of a mortgage cost calculator. Just type in the mortgage amount, interest rate, and the mortgage term to check how much repayments will cost.

Verify if you can afford the mortgage by comparing the calculated amount to how much you can afford to pay every month.

 

Will lenders accept your mortgage application?

Lenders have to carefully review your financial circumstances before they can grant you a mortgage. The rules of the Financial Conduct Authority's (FCA)  means they have to ensure that you can keep up with the repayments.

To determine how much you can afford to repay, they will have to look at:

  • If you are in permanent full-time employment
  • How much you earn
  • Your outgoings and the things that you spend your money on
  • If you have people that financially dependent on you, i.e. children
  • Your outstanding debts

Lenders will also base their judgment on:

  • Your credit history: This informs lenders how much your outstanding loans are and how well you have handled debt in the past.
  • Your age: If you are close to the retirement age, you may only be offered shorter-term mortgages, and you normally need a larger deposit. (See: How to Obtain a Mortgage if You Are an Older Borrower)
  • Your deposits: The more you can place down as a deposit, the lower the risk for the lender. Putting down a large deposit will give you more chances of being accepted, and you should also be able to be offered with a lower interest rate.
  • The value of the property: The size of the mortgage you need will have an effect on whether lenders think you can afford to keep up with the repayments.
  • The mortgage term: A shorter mortgage term implies higher monthly payments, so you may only be admitted for a larger mortgage if you pay it off over a longer period.
  • If you apply on your own or jointly: If you apply for a joint mortgage you may be able to borrow more since the income of the other person will be taken into consideration as well.

They also administer stress tests to examine whether you could still afford your mortgage if interest rates increased or if your circumstances changed, i.e. if you lost your job.

Work out your income

Sum up the following to determine your monthly income:

  • Your salary, including overtime and regular bonuses
  • Any income from your pension
  • Benefits and tax credits
  • Income from your investments, including shares, property and savings
  • Money you receive for child maintenance

Work out your outgoings

Make use of a calculator like Nationwide's budget planner, to sum up the amount of money that you spend every month.

Alternatively, determine your essential living costs and other expenditures yourself:

Calculate your living costs

Credit card balancesOutstanding loans or overdrafts
Food and drinkInsurance you pay for
Student loan paymentsPension payments
Council taxToiletries and cleaning products
Mortgage payments or rentTV licence and subscriptions
Electricity, gas and waterInternet and phone
Petrol and car maintenanceTravel fares
Clothes and accessoriesMoney you save
ChildcareChild maintenance payments
School fees or costsPet costs

What else do you spend on?

Determine the total of how much you spend in an average month on:

  • Holidays and travel
  • Entertainment like music, the cinema, or sporting events
  • Your social life, including seeing friends and dining at  restaurants
  • Buying alcohol and cigarettes
  • Gym memberships and other exercise costs
  • Gifts for other people or luxury purchases

How to afford a mortgage

If your income is presently too low to secure a mortgage on the property you want, you could wait until your income becomes higher or consider the following:

  • Choose a cheaper property, as a lower purchase price means lower mortgage payments.
  • Choose a longer mortgage term, which decreases the amount that you repay every month. However, you will have to pay a higher amount overall.
  • Look for a cheaper mortgage since a lower interest rate can make the repayments more affordable.
  • Lessen your expenses and unnecessary costs. Consider making a budget and spend less.
  • Increase your deposit, which should help you receive a cheaper mortgage.

You should also take into consideration income protection insurance, which could satisfy your mortgage repayments if you were unfit to work due to an illness or accident.

Get the right mortgage

Avoid applying for too many mortgages if you get rejected since this can hurt your credit record and make it more difficult for you to get accepted.

Deciding on the right mortgage for your circumstances can help you get accepted and come with lower costs than unsuitable deals.

You can get mortgages designed for:

  • Buying your first home
  • Self-employed borrowers
  • Older borrowers
  • If you have a small deposit
  • If you have bad credit

Save on bills

You can also cut down on other expenses like the following:

  • Electricity bills
  • Council tax
  • Water bills
  • Gas bills

How to Obtain a Mortgage if You Are an Older Borrower

 

Getting a mortgage can be harder when you get closer to retirement. Here is a guide on how to look for one whether you want to move to another house or remortgage your current home.

What is the age limit for obtaining a mortgage?

There is no maximum age for applying for a mortgage. However, some lenders have their own age limits:

  • Typically, a maximum age of 65 to 80, when you take out the mortgage.
  • A maximum age of 70 to 85, when the mortgage term ends.

This suggests that even if you are below the maximum age for a mortgage, its term could be restricted by how old you are.

If you are 60, for example, and you want a mortgage that must be fully paid before the time that you reach 70, its term could be no longer than ten years.

You will receive a greater chance of being accepted if you possess a strong credit history and if your income is large enough to easily satisfy the mortgage repayments.

Why would you want a new mortgage?

  • You avail a remortgage to get a better deal on your present home, especially if a fixed or tracker rate has expired
  • To move to a house, for example, downsizing to a smaller property

Why it can be more difficult to obtain a mortgage when you are older

If you retire before you are done paying for the mortgage, you will not have a regular salary anymore. Your income will normally decrease, which means that lenders will be uncertain if you will still be able to afford the mortgage repayments.

This suggests that granting you a mortgage gets riskier as you get older. The Mortgage Market Review (MMR) rules must be followed by lenders, which means that they have to make sure that you can keep up with repayments over the full term of the mortgage.

 After you retire, can you still get a mortgage?

Yes, some lenders will allow you to:

  • Take out a mortgage that will be unpaid until after you have retired
  • Take out a mortgage after you have retired

You will be required to prove that the income from your pension would be enough to satisfy the repayments on the mortgage. It is normally easier to do this if you are already retired because you can reveal how much you receive each month.

If you are not retired yet, you are required to request your pension provider to provide confirmation of your:

  • Current pension pot value
  • Expected retirement date
  • Expected retirement income

You could also prove that you will receive an income from other investments like property or shares.

What mortgages can you avail?

Mortgages that take in older borrowers come with fixed interest rates and several offer rates that follow the Bank of England base rate.

There are also some cashback, offset, discount and stepped mortgages that are available too.

How to get a mortgage

  • Talk to a mortgage broker because some mortgages for older borrowers are only available through them and they will examine your finances to find you a suitable deal
  • Use comparisons to look for mortgages that may accept you if you are over 50 or over 60
  • Look for specialist mortgages that are offered by lenders aimed at older borrowers, which you can usually find through mortgage brokers
  • Check the maximum age that you can be when you apply
  • Choose a mortgage that is best for your circumstances

Should you make use of equity release?

To withdraw a portion of the share of your home that you possess as a monthly income or as a lump sum, you could use an equity release mortgage. You could then make use of this to:

  • Pay for a big purchase or an unexpected cost
  • Pay off your mortgage
  • Fund your retirement

The amount that is borrowed will be repaid when the house is sold, ordinarily, after the borrower has transferred into a care home or has passed away.