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How much house can I afford?
Buying a house is a very exciting prospect, but a mortgage is a monthly commitment, and your lender needs to be confident that you can afford to make your repayments for the duration of the term (which is usually 2 or 5 years), even if the mortgage rate changes. So when you’re applying for a mortgage, lenders will assess whether you can afford to repay the mortgage that you want to take on. In the meantime, there are several factors that you can consider in order to decide how much you can afford right now, including income, expenses, deposit and interest rates.
A good rule of thumb to how much you can afford is around 4-4.5 times your annual income"
Let’s talk about income
They say that you shouldn’t discuss politics or money at the dinner table, but that rule goes out the window when you’re buying a house (well not the politics bit, that’s still up to you). When you’re working out what you can afford it makes sense to first calculate what you’re working with: your annual income. Whether you’re part time, freelance or on PAYE, you need to know: how much comes into my account each year? So before anything else, we want to determine your total annual income before taxes. When calculating it, you should include any regular salary, bonuses, commissions, or other sources of income. This may be easier for some than others. If you’re freelance, for example, it could be a bit sticky to work out exactly what you earn in a year, particularly if your income comes from many different sources. But if you’re paying taxes it shouldn’t be too hard, as your tax return has to include all your earnings.
If you’re buying the property alone, the only income you need to worry about is your own. If you’re buying in a pair and therefore have dual income, it will affect how much house you can afford. Though it’s less frequent, some people choose to buy houses as a group of more than two. This has many benefits, as all of your incomes are added together to increase the amount of house you can afford. It may affect the range of mortgage deals on offer though, as some banks and building societies prefer to lend to only two or less people. Wondering roughly how much more than your income you can afford? A good rule of thumb (though it’s important to remember that this is a rough estimate, not accounting for differences) is your yearly salary times 4-4.5. So, if you earn £50,000 a year, you could probably borrow around £200,000-£225,000. But remember, this is just a rough estimate and doesn't account for factors like savings.
How much debt can you afford to take on?
It’s more romantic to use expressions like “let’s buy our forever home 🥂” rather than “let’s get some debt!” – but we can get to the champagne, key-handing-over and housewarming party stuff in a minute. For now, let’s think about your debt-to-income ratio (DTI). Your DTI measures your monthly debt obligations (like your student loan or credit card debt) as a percentage of your gross monthly income (what we calculated a minute ago). A DTI of 43% or lower is often desirable to get a mortgage and 20% is considered best, but requirements may vary between lenders. There’s a handy principle that should help when working out what you may be able to afford, known as the 28/36 rule. The 28/36 rule refers to two things: You should spend no more than 28% of your gross annual income (pre-tax income) on housing expenses. This includes your mortgage principle (money you’re paying off your loan), interest, taxes and insurance. Your total debt (which includes the 28% housing costs) should be less than 36% of your income. This includes all your house expenses, plus other types of borrowing like credit cards or repayments on student loans or items bought on finance.
You may have more trouble borrowing money in the form of a mortgage if you’re spending more than 28% of your income on housing expenses, and/or if your total debt payments exceed 36% of your total annual income. So, if you want to work out what you can afford to pay each month towards your mortgage, try working out 28% of your monthly income (multiplying it by 0.28). If your monthly income is, say, £2,200 (the UK average per month), then your monthly repayments (both mortgage principal and interest) should be a maximum of £616. And if you wanted to work it out in terms of yearly salary: if you earn £31,772 per year (the national average in 2022) then you won’t want to spend more than £8896.16 on total housing expenses, including your mortgage repayments.
Deposits
When you’re buying a house with a mortgage, your purchase is split into deposit and mortgage. Your deposit or down payment is how much of your own cash you’re putting into your house, this is known as your equity. The remaining outstanding cost of the house will be covered by a lender (a bank or building society), this is known as your mortgage. So in order to decide how much house you can afford, you’ll need to work out how much you can put down as a deposit. A higher down payment will lower your loan amount and monthly mortgage payments. The ideal deposit is typically at least 20% of the home's purchase price. If you have less than 20% equity in your house, you are considered a more “risky investment” to lenders. So not only is a larger deposit beneficial to you (smaller repayments) but you’re also a safer investment to the lender. If your deposit is less than 20% you will most likely have to pay private mortgage insurance (PMI). This insurance protects the lender, and is most often paid as a premium added onto your monthly mortgage repayments. You will usually pay between 0.5% - 1% of the entire mortgage in PMI if your deposit is less than 20%. There are options for smaller deposit loans though - there are even some 100% mortgages (meaning you pay £0 as a deposit), but they usually come with strict borrowing guidelines, a guarantor requirement and/or higher interest rates. Telling your bank or broker the amount you can put down as a deposit will help them to calculate how much house you can afford. Your income and deposit work together to inform your lender about how much you can borrow. Some people may have a large deposit (say they’ve had a one-off bonus, or they’ve inherited a lump sum of money) but their income is relatively low - your lender will consider these factors together in order to decide how much house you can sensibly borrow. A broker or mortgage advisor is a useful ally to have at this point, as they can use their experience and knowledge of the market to find the best mortgage for you, considering all your specific circumstances.
Don’t forget additional costs
Remember to account for other home buying costs such as stamp duty tax, legal fees, estate agent fees (though we don’t charge these at Strike), removal costs and maintenance expenses. There’s no point calculating how much you can afford (both as deposit and loan) if you haven’t thought about extra financial obstacles - you need to have budgeted for both predicted and unexpected obstacles – like a buffer amount to see you through the purchase.
Ready to make your move?
To get a more accurate idea of how much house you can afford, it's advisable to consult with a broker or directly with a lender in order to get pre-approved for a mortgage. This is called getting a Mortgage in Principle (MIP), Agreement in Principle (AIP) or Decision in Principle (DIP). This process involves a detailed assessment of your financial situation and will provide you with a specific loan amount that you can comfortably handle. It’s not a guarantee of the loan, but is a useful way to work out what kind of mortgage you could be able to get. Getting a Decision in Principle
You can use a mortgage calculator from a trusted source, which will give you a rough estimate of how much house you’ll be able to afford. The calculator is less reliable than your MIP application, but it is a useful first indication. Most mortgage calculators will require the following information: Your income. How many people are applying. Your regular expenditures (this includes things like loans and educational fees, but not your Starbucks coffee fund.) Your borrowing circumstances e.g. are you a first time borrower, remortgaging or moving house and looking for a new deal.Mortgage calculator
The market and interest rates
It’s all very well thinking about your situation (income, deposit and so on), but unfortunately as a buyer you don’t exist in a vacuum. How much you’re able to afford will depend on what the market looks like. The market is currently quite cool, after having heated up following the Stamp Duty holiday. The cooling came following the removal of affordable mortgage products from the market at the end of 2022. Now affordable mortgage deals are starting to reenter the chat, the market could be bolstered. In the meantime, if you’re a first-time-buyer looking for an affordable property, now could be a good time to make your move, while house prices remain reasonably low.
Your interest rate or mortgage rate (the interest you’ll pay on your loan) will also be affected by the state of the mortgage market, and wider interest rates generally. The base rate set by the Bank of England changes how affordable it is to borrow money. 2023 has seen some hikes in interest rates in a bid to decrease inflation, so borrowing is currently more expensive than it has been in a long time. A mortgage broker is a great asset during more turbulent times because they’ll scour the market for the best deals. Strike Mortgages has a team of mortgage brokers standing by to help find the best mortgage for you.
So ultimately it will be the lender that decides whether you can afford to buy a specific property with a specific mortgage. The consequences of taking out an unaffordable mortgage that you can’t sustain can be really serious, which is why we do such rigorous assessments. In the meantime, there are loads of things you can do yourself to work out what you can afford right now.
FAQs
How much house can I afford on a £50k salary?
If you’re looking to calculate what mortgage you may be able to take out with your salary, a good rule of thumb is to multiply your yearly income by 4.5. This isn’t an exact rule, but it’s a good guideline. So if your salary is £50,000, you will be able to borrow £225,000. This will depend on a number of factors though, particularly the size of your deposit.
Should I borrow as much as I can afford?
Should I save more for a deposit before I buy my house?
How can I work out what I can afford?
What size deposit should I have to be able to afford a house?
What other costs should I consider when buying a house?
What is the debt-to-income ratio?
How is the affordability of a house determined?
Will using a mortgage or affordability calculator affect my credit score?
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