The question here is not how much money you could borrow, but how much you could pay back. Affordability is not just about how much money you yourself think you can afford, but how much money the mortgage lender thinks you can afford.
Affordability can be a very subjective thing, what one person feels is affordable to another may not be. This, in turn, can present a problem for lenders as they weigh one person’s ability to pay a mortgage against another person’s ability to pay the same loan.
The only way for mortgage lenders to get around this problem is to devise their own affordability system. This is not as daunting as it may seem at first because each mortgage lender may have their own criteria and with that in mind it is worth looking at what individual mortgage lenders offer and what is best for you.
As an example, let’s say a mortgage lender stipulates that you can borrow 3 times your annual salary minus any other loans you have accumulated. To break it down, simply take an annual income of 20,000 with another 300 monthly loans. So your annual loan is 12 times 300 or 3,600. Subtract this from your annual salary and the figure is 16,400. Then multiply this by 3 to determine how much the mortgage lender is willing to lend you, a figure of 49,200.
Don’t worry if your income is the same or less, as all lenders are very different. Three times your income is a very conservative estimate these days. Most of the lenders will lend 4 times the amount and more and some will go to more than 5 depending on your criteria and your circumstances. In some cases, the lender will ignore current expenses like car loans and credit cards, unlike the case above, so it’s worth taking the time and attention to search for the lender with the criteria that best fits you. their individual circumstances. Shopping around.
There is another way that some mortgage lenders will assess how much money they are willing to lend you based on entirely different criteria. What they do is decide what percentage of their annual income to set aside for loans. As an example, let’s say they decide that 40% of the income of 20,000 will be set aside for loans. That works out to 8,000 for an income of 20,000. They then deduct from this any other loans, like a car loan that costs $300 a month or $3,600 a year. This leaves a figure of 4,400 a year or 367 a month that they estimate you can afford to pay back each month.
While no one can really say how much a person can afford, these types of calculations are made to ensure that a certain degree of responsibility is carried out on loans. All lenders have to prove to their regulators that they have not lent money irresponsibly.
These regulations also exist for your benefit. You want to have a mortgage that you can comfortably afford, not just now, but for years to come. What you can forget when initiating a mortgage is that the economic climate changes, interest rates fluctuate, and your mortgage payments can change with it. For that reason, you need to be able to pay your mortgage now, because if you can’t, how can you expect to be able to pay it in the future?
So when getting a mortgage, it’s always wise to check your own affordability and make sure any affordable mortgage you arrange now is affordable after a few percentage points come up. So if they haven’t already, ask your mortgage advisor to quote you the same mortgage with a three percent rate increase and see how affordable it is then, if you find it’s still affordable then you should be sure continue.
