Mortgages: Affordability

What you can afford to buy is usually dependent on your income. A bank or building society typically lends a maximum of four and a half times your annual salary for a mortgage. If this is for two people, then it’s four and a half times your combined salary. This calculation will help you to identify what type of property you can consider based on its price.

If you earn £30,000 you might be offered a mortgage of £135,000. A combined salary of £60,000 if buying a property with someone else will bring your potential mortgage offer up to £270,000. This will give you an idea of the type of property that you should be considering. You’ll be required to pay a deposit when applying for a mortgage. This is a percentage of the value of the property. When saving for a deposit, you should shop around for high interest savings accounts or high interest cash ISAs that can help you reach your goal more quickly. In a cash ISA your money is protected from tax, so any interest that you earn on your savings won’t be taxed as income.

The loan-to-value ratio or LTV, is an important figure to be aware of when purchasing a property. It’s based on the amount you pay as a deposit, represented as a percentage of the total value of the property. If you put down 20% deposit, then your LTV is the remaining 80% of the property’s value. A higher LTV, i.e. a smaller deposit, generally means a higher interest rate. This is due to the increased risk that you may fall behind with mortgage repayments or default. If a lender has to repossess the home, they may not get back what they lent you for the initial purchase. In general, the lower the loan-to-value ratio or the higher your deposit, the better the rate of interest you’ll pay on your mortgage. Some believe mortgages above 90% LTV are not allowed, but they do exist. While they may be harder to obtain and carry higher interest rates or special conditions, they are possible.

Certain lenders, especially for first-time buyers or those under government-backed schemes, may allow as little as 5% deposit. Some schemes offer first-time buyers the ability to buy a home for an amount below market value, or on another special deal. A first-time buyer is someone who has never owned a property, even if it was bought for them. There are savings or investment accounts designed to help you buy your first home. These may come with government bonuses, but also some restrictions. Some of these schemes apply to England only, and many of them come with property price caps. If you’re struggling to put together a large deposit, look on the gov.uk website for schemes that can help you. You will still need to prove you can afford the mortgage repayments.

Shared ownership is a type of housing scheme designed to make buying a home more affordable, especially for first-time buyers. It helps people get onto the housing ladder with a smaller deposit and mortgage. Instead of buying 100% of a property, you buy a share, usually between 10% and 75%, and pay rent on the remaining share to a housing association or developer. The rent on the share that you don’t own is usually subsidised, but may rise over time. You may also pay service charges for maintenance, particularly in flats. Your monthly repayment might be similar to those with a 100% mortgage, but shared ownership brings down the deposit amount, making affordability more accessible. Your monthly repayment might be similar to those with a 100% mortgage, but shared ownership brings down the deposit amount, making affordability more accessible.

For example, if you’re buying a 25% share of a £300,000 home, the value of your share will be £75,000. The deposit is usually calculated between 5 and 15% of the share that you’re buying. If a 5% deposit is required, you would need to put down a deposit of £3,750. You will then need a mortgage for the rest of your share – the remaining £71,250. On a repayment mortgage at 4% interest, your monthly repayment would be £356. You would still need to pay rent on the other 75% of the property that you don’t own. Rent is often calculated as around 3% of the unsold value per year. In this case, this will be around an additional £550 in rent on top of the mortgage payment. Usually there’s flexibility to increase your share later. You can buy additional shares in chunks until you own 100% of the property. At that point, you would stop paying any rent.

Watch out for conditions on any scheme you go for. For example, does it need to be a new build home or previously purchased with the same scheme? If it is to be a stepping stone, then checking the rules around selling will be important. There are often restrictions around the amount you earn, your age and whether you’re a first-time buyer. These restrictions often apply when exiting too, so you might only be able to sell to someone eligible for the same scheme. Local councils can set eligibility criteria, and they often use this to prioritise key workers. The criteria for support can change, so always check the official gov.uk website or speak to a mortgage adviser for up-to-date information.

Most mortgage lenders accept family gifts towards your deposit. Lenders usually require a gifted deposit letter from your family member. This is a legal declaration confirming that the money is a gift, not a loan, and that they have no legal interest in the property. They will also need to provide proof of ID and a bank statement showing the source of the funds. Some lenders may ask for a signed solicitor’s letter too. Be aware that large, unexplained gifts can trigger anti-money laundering checks, which could delay the application. If the gift is a loan, it must be declared. This can affect affordability. You might not be able to borrow as much as if it was gifted outright.

Multiple buyers can pool their savings to reach the required deposit more quickly. Combined applications increase the combined income, allowing buyers to borrow more money. A larger deposit or higher combined income might also give access to a wider range of mortgage deals with low interest rates. If you’re buying with someone who you’re not married to, make sure you have a clear agreement in place outlining the share of ownership and exit agreement. This will help you avoid potential disputes over the property.

Buying a home is one of the biggest financial steps you’ll take and understanding deposits, loan-to-value ratios and the support schemes available can make that step feel more achievable. The key is to know your options, explore what help you’re entitled to and be realistic about what you can comfortably afford. With the right preparation, you can move forward with confidence on your journey to home ownership.

Related Resources go here…