Buying a new home is a long-term financial commitment, and knowing how much you can afford is vital to avoid worrying later. The mortgage you can afford depends on several factors, including your income and outgoings. If you’re unsure how mortgages work and what’s best for your circumstances, this guide can help.
Learn about what lenders consider to determine affordability and the different mortgage types below.
Learn about what lenders consider to determine affordability and the different mortgage types below.
Key Takeaways
1. Credit score:
Your credit score is the first thing lenders will consider when determining your mortgage affordability.
2. Income:
Lenders want to know your income, including any bonuses or tax credits.
3. Outgoings:
Lenders check how much of your income you spend to evaluate the size of your deposit.
4. The size of your deposit:
The size of your deposit is vital in establishing how much you can afford.
5. Employment status:
If self-employed, you must provide two or three years of SA302 tax calculations and the tax year overviews.
How do mortgage lenders determine affordability?
Some of the things mortgage lenders consider to determine your affordability include:
• Credit score
• Income
• Outgoings
• The size of your deposit
• Employment status
• Other debts
1. Credit score
Your credit score is the first thing lenders will consider when determining your mortgage affordability. This helps them understand how you handle your finances to assess whether you’d be a reliable borrower.
2. Income
Lenders want to know your income, including any bonuses or tax credits. This is so they can offer the best deal for your circumstances. If you’re applying for a mortgage as a couple, they’ll want to check your combined income.
3. Outgoings
Lenders check how much of your income you spend to evaluate the size of your deposit.
4. The size of your deposit
The size of your deposit is vital in establishing how much you can afford. Generally, the higher the deposit, the more competitive your mortgage rate.
5. Employment status
If self-employed, you must provide two or three years of SA302 tax calculations and the tax year overviews.
Learn more about buying a home when self-employed in our comprehensive guide.
6. Other debts
Lenders check whether you have any loans or credit cards, which may impact your ability to afford your monthly repayments.
You can use our Mortgage Affordability Calculator to determine how much you can borrow.
What mortgage types are best for me?
The most common mortgage types include:
- Fixed-rate mortgage. The interest rate is fixed at a certain amount for a specific period. Once the period ends, you’ll be automatically moved to your lender’s standard variable rate (SVR).
- Variable-rate mortgage. Your mortgage lender sets the rate, meaning it could go up or down if they change it. SVRs are normally between 2% and 5% higher than the Bank of England base rate.
- Interest-only mortgage. With interest-only mortgages, you only pay back the interest each month. Monthly repayments are often cheaper than a repayment mortgage, but you’ll still owe the full amount.
- Discount mortgage. Discount mortgages are offered with a discount on the lender’s standard variable rate, not the Bank of England’s base rate.
- Tracker variable-rate mortgage. Monthly payments align with the Bank of England base rate.
Browse our brand-new 2, 3, 4 and 5 bedroom homes. Whether relocating with a growing family or for work, we have a home for you. Explore our unique homebuying offers and start your journey to homeownership with David Wilson Homes today.
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