How much can I borrow mortgage? Mortgage calculator and affordability explained amid high interest rates

Both the cost of living crisis and Bank of England’s decision to raise interest rates have made it crucial to understand what mortgage you can afford

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For anyone looking to buy their first home or remortgage their current property, it has been a tough 12 months.

Mortgage rates have rocketed over the past year as the Bank of England has sought to bring down inflation. The UK central bank’s interest rate is widely expected to hit 5.5% in September.

But political turmoil has played a big part too, with Liz Truss’s brief tenure as Prime Minister sending rates soaring after spooking the markets with a swathe of unfunded tax cuts. Despite seeking to undo the work of his predecessor, Rishi Sunak’s time in office has seen an even worse spike this summer.

With homeowners being hit by the cost of living crisis in a generation, the housing market has slowed down. Although prices are down on a year ago, they have not fallen by enough to wipe out the huge gains many homeowners recorded during the Covid pandemic rush for space.

It may be enough to make you wonder whether or not you can afford to buy right now. So how can you find out what mortgage you can afford - and how is it calculated?

How are mortgages calculated?

Mortgages are calculated by looking at your employment status, incomings and outgoings.

Your credit score is also a major factor in determining whether or not you will be able to get a loan. It is therefore crucial that you check it and make sure it truly reflects your record. You can even boost it by, for example, getting a credit card to show you’re a reliable borrower.

The Bank of England has increased the base rate to 1.75% (image: AFP/Getty Images)The Bank of England has increased the base rate to 1.75% (image: AFP/Getty Images)
The Bank of England has increased the base rate to 1.75% (image: AFP/Getty Images)

Lenders will want to assess whether you can keep up with your monthly mortgage repayments. Your income includes:

  • Your salary
  • Income from pensions or investments
  • Income from child maintenance payments and financial support from ex-spouses
  • Any other earnings – including overtime, commission or bonuses from your job, as well as any other jobs you have.

To assess your income, lenders ask for payslips and bank statements that act as evidence of your earnings. Self-employed people also need to provide business accounts, income tax details and tax returns dating back up to three years.

Your outgoings include:

  • Credit card repayments
  • Maintenance payments
  • Insurance - such as for building, contents or travel
  • Any other loans or credit agreements you have
  • Utility bills

The lender may also require you to estimate other living costs, like how much you spend on clothes or recreation. Recently, Experian partnered with Leeds Building Society on a scheme that will mean subscriptions and other everyday outgoings, like Netflix, can count towards you securing a mortgage.

But it mainly comes down to income, according to Almas Uddin, founder of mortgage broker company Revolution Brokers. “Your income multiple, additional income and outgoings will all impact a lender’s decision with regard to how much they will offer you in the form of a mortgage,” he says. “Using this information, they will carry out an affordability assessment, but they will also stress test your repayment ability.

“This ascertains whether or not you will be able to cope with your mortgage repayments in the events that the monthly cost increases, or if there is a change to your income, for example if you lose your job, change professions, or have a child.”

As of 1 August 2022, lenders no longer have to undertake a stress test when determining mortgage affordability after the Bank of England changed the rules. This mechanism was an analysis of a prospective borrower’s ability to repay their mortgage in the event of a major change to their income or outgoings, such as the birth of a child.

Instead, they only have to conform to the loan-to-income (LTI) limit. This limit caps the number of mortgages that can be granted to borrowers at LTI ratios at or greater than 4.5.

It is designed to protect lenders from collapsing if too many borrowers cannot repay their loans - an issue that was a feature of the 2008 financial crash. The Bank of England said ditching the test would retain an “appropriate level of resilience to the UK financial system” while also making mortgage rules “simpler, more predictable and more proportionate”.

The LTI rate tends to govern how much mortgage you can borrow (image: Getty Images)The LTI rate tends to govern how much mortgage you can borrow (image: Getty Images)
The LTI rate tends to govern how much mortgage you can borrow (image: Getty Images)

However, Gemma Harle, MD at Quilter Financial Planning, said at the time that the change could make it harder for first time buyers to get on the property ladder as it would fuel house price rises.

How much can I borrow for a mortgage?

According to Revolution Brokers, you will generally be able to get a mortgage worth between four to six times your annual income. So, if you and your partner earn a combined total of £50,000 a year, you will probably be able to get a mortgage of at least £200,000.

However, if you have substantial savings that can act as a deposit, this rule of thumb might not apply to you. Also, if you’re able to extend your mortgage over a longer period, it can make it easier to borrow - although you will end up paying more overall due to the interest payments on top of your loan.

These interest payments are there so that the lender is able to recoup the value of the money you have borrowed from them. The government has previously said it is considering introducing extra-long-term mortgages to open up the housing market to more people.

There are several ways you can boost your mortgage (image: AFP/Getty Images)There are several ways you can boost your mortgage (image: AFP/Getty Images)
There are several ways you can boost your mortgage (image: AFP/Getty Images)

What is a mortgage calculator?

Short of going through a mortgage brokerage process, a way to roughly work out how much mortgage you could afford is to head to a mortgage calculator.

Publicly owned financial advice website Money Helper has a calculator you can use. Money Saving Expert and Which? also have mortgage calculators. But not all comparison sites will give you the same results, so it’s worth getting a few estimates to understand what range you’re looking at.

How can I boost the mortgage I can borrow?

Industry expert Almas Uddin says there are several ways you can maximise the amount of mortgage you can borrow.

  • Get a decent mortgage broker

“A good broker will help you get the most competitive rates and pricing, as well as suggesting the best possible mortgage products to suit your individual situation,” he says. “Ideally, you want to opt for a whole-of-market broker as they have access to every product on the market at a given time.

“All too often, buyers go straight to their bank as they are a familiar face, but in doing so they can seriously limit the options open to them. As a broker also deals in volume, lenders will often offer them more favourable rates and so a good broker is certainly able to determine the quality of the mortgage you can secure.”

  • Have a financial spring clean

“Clear your debts, close any accounts that are surplus to requirements to streamline your credit footprint, do what you can to improve your credit rating and if you’re in line for a pay rise, hold out for it until you apply,” Mr Uddin recommends. “You can also use a budget planner to stay on top of costs and save consistently to demonstrate signs of financial responsibility.”

  • Avoid major life changes when applying for a mortgage

“Changing employment or becoming self-employed before applying, splashing out on a major purchase such as a new car and co-signing on a loan for someone else could impact your mortgage affordability - especially in the current climate”, Almas Uddin says.

“Multiple new searches on your credit report can also be damaging, such as new credit cards or bank accounts. Borrowing too much, having existing outstanding debts and even major lifestyle changes such as having children can also work against you. It probably goes without saying, but any recent defaults or county court judgements are also a big red flag.”