A woman looking at mortgages on a tablet.

How to assess your affordability when taking out a mortgage

As house prices reach record highs, assessing affordability when you’re buying is more important than ever. It can help you search for properties within your budget and ensure your long-term finances are secure. 

Over the 12 months to August 2022, the average house price increased by 11.5%, according to the Halifax House Price Index data. The value of a typical property in the UK now exceeds £290,000.

Whether you’re a first-time buyer or are looking to move up the property ladder, it’s vital you consider how rising house prices may affect affordability. A mortgage is often one of the largest loans you take out and you’ll likely be making repayments for decades.

So, having confidence in your ability to meet this financial commitment is essential. 

Lenders will assess your affordability when reviewing your application 

When you apply for a mortgage, lenders will carry out affordability tests. This will include looking at your income and other outgoings.

Lenders may also assess how well you’d cope if your mortgage interest rate increased. Interest rates are still low but high levels of inflation mean that they are gradually rising. As a result, if you choose a variable- or tracker-rate mortgage the interest rate, and your repayments, may increase too. 

Before you apply for a mortgage, it’s a good idea to consider what information a lender will use when conducting an affordability check. This can help you flag potential issues and resolve them.

Providers will use your credit report to assess the likelihood that you’ll default on your repayments. You can review your own credit report for free without affecting your score. Make sure all the information is correct and assess if it contains any negative factors.

A low credit score or negative factors don’t automatically mean you can’t take out a mortgage, but you may need to approach a specialist lender. 

Lenders may also check your bank statements. They will check for red flags, such as frequently using your overdraft, using a payday lender, or spending on gambling. 

Assessing your affordability can give you confidence 

While a lender may carry out affordability tests, conducting your own can be useful and give you confidence. 

You should consider what disposable income you need to live the lifestyle you want, and how paying a mortgage could affect this. By doing your own affordability test you can ensure your finances reflect your priorities and other long-term goals.

It also means you can understand your position before you apply for a mortgage.

A good place to start is to apply for a “mortgage in principle”. 

A mortgage in principle gives you an idea of how much you can borrow. You can fill in an application with a lender and it usually won’t affect your credit rating. It means you can get a rough idea of how much your repayments will be and how the amount you want to borrow will affect them. It can also help you understand what interest rate you’re likely to pay.

Keep in mind that a mortgage in principle isn’t a guarantee, as lenders won’t carry out a full credit check and may request more information when you apply for a mortgage.

You can also use online calculators to see how changing the mortgage term or interest rate would affect your ability to make repayments. This can mean you’re able to plan better for future rate rises and know you have room in your budget to accommodate them if necessary. 

Taking some time to assess affordability yourself, rather than relying solely on a lender’s test, is useful. Not only can it give you confidence, but it can also ensure your budget can stretch far enough to meet other goals that a bank may not consider. For example, you may want to put money away for retirement or create a holiday fund. 

This step can help you balance home ownership goals with other things that may be important to you. 

Do you want help understanding your affordability?

Navigating buying a new home can be difficult and it means making large decisions. If you’d like some support, we’re here to help.

We can work with you to understand what would be affordable and, once you’ve found your next home, assist with applying for a mortgage. Our team can help you approach the lenders that are right for your circumstances and could secure you a more competitive interest rate to cut your repayments. 

Please contact us if you’d like to discuss your mortgage needs. 

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

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