How Much Can I Afford on a Mortgage?

There’s no feeling quite like getting the keys to a home. It’s yours. You’re given free rein to be The Boss when it comes to decorating and you finally have a slice of sanctuary to call your own. But amidst the excitement, it’s wise to plant your feet firmly on the ground by answering a couple of questions – how much can I afford on a mortgage? How much can I afford on a house?

Purchasing a home is a decision that will impact your finances for years to come. To avoid winding up with a mortgage that you can’t afford, you’ll need to get to grips with how much you can afford on a house. This will depend on several factors, including income, expenses, deposit and interest rates.

Gather your income figures

When you’re working out what you afford, it makes sense to understand exactly what you’re working with: your annual income. Whether you’re part-time, freelance or PAYE, you need to know exactly how much goes into your bank account each year. Get a couple of figures in hand: your annual income before taxes, including your salary, bonuses commissions or other sources of income.

If you’re a freelancer, this amount may vary from year to year. But if you’re paying taxes, it shouldn’t be too hard to work out as your tax return has to include all of your earnings.

A good rule of thumb as to how much mortgage you can afford is around 4 to 4.5 times your annual income. For example, if you earn £50,000 a year, you might be able to borrow around (£200,000 - £225,000), depending on your financial picture.

If you’re buying a property alone, the only income to consider is your own. If you’re buying it with someone, you’ll need to know their financial numbers too, as this will affect how much you can afford on a house.

When you have a few figures together, you can use a handy mortgage calculator to quickly see how much you could borrow for a house purchase. All you need is your income and deposit.

How much debt can you afford to take on?

Just because you can – on paper – afford to buy a £225,000 house doesn’t necessarily mean you should. A mortgage is essentially debt you take on, and owning a home comes with more expenses than just a monthly mortgage payment.

Your debt-to-income ratio (DTI) measures your monthly debt obligations (such as student loan or credit card debt) as a percentage of your gross monthly income. Lenders will be looking at your DTI when considering you for a mortgage, so it’s worth knowing your figure. A DTI of 43% or lower is often desirable to get a mortgage, and 20% is considered ideal – though requirements may vary between lenders.

What about your deposit?

When buying a house with a mortgage, your purchase is split into your deposit and your mortgage.

Your deposit is how much cash you’re putting into your house up front – this is known as your equity. The remaining outstanding cost of the house will be covered by a lender, which is known as your mortgage.

To understand how much house you can afford, you’ll need to work out how much you can put down as a deposit. A higher deposit can unlock some great mortgage offers, lowering your loan amount and monthly payments. However, there are options for smaller deposits, though you may be considered a more ‘risky investment’ to lenders, and the mortgage may come with strict borrowing guidelines.

Interest rates will impact your mortgage

The interest rate on your mortgage (the interest you pay on your loan) will be impacted by the state of the mortgage market and the wider interest rates. The base rate set by the Bank of England changes how affordable it is to borrow money. As interest rates change, the price you pay can rise and fall.

Working with a mortgage advisor is a great way to lock in the right mortgage deal for your needs. They’ll scour the market for deals and compare mortgage rates to find suitable options within your budget. At Purplebricks Mortgages, our advisors are ready to help you find a mortgage that suits your needs – so you’re one step closer to your next home.

Don’t forget additional house-buying costs

When buying a home, you’ll need to factor in additional costs – such as stamp duty tax, legal fees, removal costs, home insurance and maintenance expenses. To better understand how much cash you should have on hand, check out the costs of buying a house here.

Find a mortgage

Ready to take the plunge and understand what you can afford on your next home? The team at Purplebricks Mortgages are ready to help you find the right mortgage deal to suit your budget. Contact us today to get started.