Whether you’re buying your first home or are considering borrowing more through a mortgage, assessing your ability to keep up with repayments is important. With property prices soaring, research suggests households are allocating more of their budget to housing costs than before. 

A mortgage is often the largest loan you’ll ever take out. Even when you’re remortgaging, the sums you’re borrowing could be far higher than other types of borrowing you might be using. So, taking some time to assess whether your repayments are affordable could give you confidence.

First-time buyers are spending 37% of their take-home pay on mortgage repayments 

Soaring property prices mean households are spending more of their take-home pay on mortgage repayments. 

According to the BBC, in July 2024, property prices increased by 2.1% when compared to a year earlier – the fastest pace since December 2022. The average house price increased to more than £266,000. 

In addition to rising house prices, interest rates are higher than they were at the start of the decade. The Bank of England’s (BoE) base interest rate was low following the 2008 financial crisis and was cut further during the Covid-19 pandemic to support the economy. However, when inflation started to rise, the BoE increased the base rate.

Between November 2021 and August 2023, the base rate increased from 0.1% to 5.25%. This led to many families with a mortgage seeing their repayments rise significantly.

The good news for mortgage holders is that as inflation has started to stabilise, the BoE has cut its base interest rate. As of September 2024, the interest rate is 5%, and there’s speculation it will be cut again in the coming months.

These two factors have led to the average first-time buyer spending around 37% of their take-home pay on mortgage repayments – a figure that is well above the long-term average of 30%. 

So, when you’re reviewing your mortgage and searching for a new deal, assessing what’s affordable could be valuable. 

Mortgage lenders will assess your ability to meet repayments

When you apply for a mortgage, the lender will assess your ability to meet repayments.

These affordability checks are designed to highlight when a potential borrower could be more likely to default on mortgage repayments and prevent irresponsible lending. Each lender sets their own affordability criteria. So, while one lender might say a £300,000 mortgage is unaffordable for you, another may not agree.

As a result, when you’re searching for a mortgage, understanding if you match a lender’s criteria could be important. This is a step a mortgage adviser could help with. 

One of the key areas that banks will consider when assessing your affordability is your income. Indeed, you often see the potential amount you could borrow through a mortgage represented through a multiplication of your household’s annual income. 

For example, you may see that you can typically borrow between 4.5 and 5.5 times your annual salary. 

However, this isn’t all lenders will look at. They’ll also consider how stable your employment is and your outgoings. If your financial commitments are higher, the amount deemed affordable could be less. For instance, if you have a high amount of credit card debt or personal loans, a lender may say you can borrow less than you expect.

Calculating affordability yourself could give you confidence 

Even when a mortgage lender is confident you’ll be able to meet mortgage repayments, carrying out your own affordability assessment could be useful. 

For example, are you comfortable with the monthly repayments? How would your finances fare if the interest rate you pay increased?

Doing an affordability test yourself could help you understand how the mortgage repayments could fit into your wider budget. You might have other spending priorities which could mean borrowing a sum that’s deemed affordable by a mortgage lender doesn’t align with a wider budget or goals. So, doing your own calculation before you decide to go ahead with a mortgage could be important.

We could help if you’re searching for a mortgage

If you’re searching for a mortgage, we could help. As mortgage advisers, we may work with you to assess which mortgage options might be right for you and the effect they could have on your regular outgoings. 

What’s more, working with a mortgage adviser may lead to you securing a mortgage with a lower interest rate than if you search the market and apply alone. So, choosing to work with a professional could save you money over the long term.

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.

Approver Quilter Financial Services Limited & Quilter Mortgage Planning Limited. 04/10/2024