It’s a question that many people ask when they are considering buying a house. Mortgages can be confusing, and it’s not always clear what factors determine how much you can borrow.
In this article, we’ll go through everything you need to know about mortgage affordability and how to calculate how much you need to earn to qualify for a £150,000 mortgage.
Factors Affecting Mortgage Affordability
Income is a significant factor that affects how much you can borrow for a mortgage. Lenders use the income multiple approach to calculate your maximum borrowing capacity. Typically, lenders will allow you to borrow up to 4.5 times your gross annual income. This means that to qualify for a £150,000 mortgage, you’ll need to earn at least £34,000 per year. Keep in mind that this is a general rule, and other factors, such as credit history and debt-to-income ratio, also play a role in determining how much you can borrow.
Lenders will check your credit file to determine if you are a reliable borrower. If you have a poor credit history, you may find it harder to get approved for a mortgage or have to pay higher interest rates. To improve your credit score, pay bills on time, avoid missing payments, and don’t take out too much credit at once.
Debt-to-income ratio is a measure of your monthly debt payments divided by your gross monthly income. Lenders use this ratio to determine how much you can afford to borrow for a mortgage. A low debt-to-income ratio is better because it shows that you have enough income to cover your debts. Try to keep your debt-to-income ratio as low as possible.
Loan-to-value ratio (LTV) is the amount of the mortgage loan compared to the value of the property. For example, if you’re buying a £200,000 house and putting down a £50,000 deposit, your LTV would be 75%. A lower LTV means that you have more equity in the property, which can improve your chances of getting approved for a mortgage and reduce your interest rates.
Interest rates will also affect mortgage affordability. If interest rates are high, your monthly payments will be higher, and it may be harder to qualify for a mortgage. If interest rates are low, your monthly payments will be lower, and you may be able to borrow more.
The term of the loan is another factor that affects mortgage affordability. The longer the loan term, the lower your monthly payments, but the more you’ll pay in interest over time. A shorter loan term means higher monthly payments, but you’ll pay less in interest over time.
Estimating Mortgage Affordability
To estimate mortgage affordability, lenders initially use income multipliers to determine how much you can borrow.
Typically, lenders will allow you to borrow up to 4.5 times your gross annual income. However, other factors, such as credit history and debt-to-income ratio, also play a role in determining how much you can borrow. The Financial Conduct Authority (FCA) prescribes rules for banks and lenders to assess affordability and promote responsible lending.
To calculate how much you need to earn to be eligible for a £150,000 mortgage, you can use the income multiple approach. Based on the typical multiple of 4.5, you’ll need to earn at least £34,000 per year before tax to qualify for a £150000 mortgage. Your actual outgoings will have an impact on how much you can borrow.
Additional Costs to Consider
In addition to the mortgage itself, there are several other costs when buying a house.
The deposit is typically the most significant cost, and lenders may require you to put down a deposit of at least 5-10% of the property value. Saving for a larger deposit can reduce your monthly payments and improve your chances of getting approved for a mortgage.
Mortgage fees, such as arrangement fees, valuation fees, and booking fees, can also add up. Be sure to budget for these fees when estimating your overall costs.
Stamp duty is another cost to consider. It is a tax that you pay when you buy a property. The amount of stamp duty you’ll pay depends on the property value, but there are ways to reduce this cost, such as buying a property below the stamp duty threshold or claiming first-time buyer relief.
Conveyancing fees are legal fees associated with buying a property. They can vary depending on the complexity of the transaction, but it’s essential to budget for these fees when buying a house.
Survey and valuation fees are also costs to consider when buying a house. A surveyor will assess the condition of the property and provide a report, which can help you avoid unexpected costs down the line. Be sure to choose a reputable surveyor to get an accurate assessment.
Finally, there are ongoing costs to consider, such as home insurance, council tax, and maintenance costs.
Tips to Improve Mortgage Affordability
Improving your credit profile, reducing your debt-to-income ratio, and saving for a larger deposit are all effective ways to improve your chances of mortgage success.
To improve your credit profile, make sure to pay bills on time, avoid missing payments, and don’t take out too much credit at once. If you have a thin credit file, consider getting a credit card or a small loan to establish credit.
Reducing your debt-to-income ratio can also improve your mortgage affordability. Consider paying off high-interest debt or consolidating debt to lower your monthly payments.
Saving for a larger deposit can also improve your chances of getting approved for a mortgage and reduce your monthly payments. Try to save at least 10% of the property value, but the more you can save, the better.
Can you get a £150,000 mortgage with bad credit?
If you have bad credit, it can be harder to get approved for a mortgage. Lenders will consider your credit history when assessing your application, and a poor credit score can result in higher interest rates or even rejection. However, some lenders specialise in bad credit mortgages, so it’s still possible to get a mortgage.
Can you get a mortgage if you’re self-employed?
If you’re self-employed, you can still get a mortgage, but you may need to provide extra proof of income. Lenders will want to see evidence of your income, such as tax returns and bank statements.
Certain lenders will allow you to use limited company retained profits to boost your income calculation.
How Can a Mortgage Broker Help?
A mortgage broker can help you find the best mortgage for your needs and help you get approved for a larger mortgage than £150,000 if needed. Brokers have access to a wider range of lenders and can help you find the best rates and terms. They can also provide expert advice and help you navigate the complex mortgage application process.
CONTACT A MORTGAGE BROKER
If you are ready to take the next step then we can put you in touch with a fully qualified independent mortgage broker.
In conclusion, understanding how much you need to earn for a £150K mortgage is essential when considering buying a house. Income, credit history, debt-to-income ratio, loan-to-value ratio, interest rates, and the term of the loan are all factors that affect mortgage affordability.
Saving for a larger deposit, improving your credit profile, and reducing your debt-to-income ratio are effective ways to improve your mortgage affordability. Remember to budget for additional costs, such as deposit, mortgage fees, stamp duty, conveyancing fees, and ongoing costs. And don’t forget to consult a mortgage broker for expert advice on finding the best mortgage for your needs.
