What a Lender Will Offer Is Not What You Can Afford
Affordability is really two questions that people run together. The first is how much a lender will advance, which follows fairly mechanical rules about income multiples and debt ratios. The second is how much you can comfortably carry, which depends on things a lender does not see and does not price.
This calculator answers the first and gives you the figures to think about the second, since the gap between them is where most housing stress originates.
How to Estimate What You Can Borrow
Existing debt affects the answer more than most people expect, because it eats directly into the ratio.
- Enter your gross annual income, including a partnerβs if you are buying jointly.
- Enter your existing monthly debt payments, car finance, loans, credit card minimums, student loan repayments where they count locally.
- Enter your deposit, which sets the loan-to-value and often the interest rate you will be offered.
- Enter the mortgage rate and term you expect.
- Read the borrowing estimate and the resulting monthly payment.
- Add the ownership costs a lender may not test: maintenance at roughly 1 per cent of value a year, insurance, property tax and service charges.
How Lenders Actually Decide
Two constraints usually bind. An income multiple caps the loan at some factor of gross income, often four to five times, though it varies by country and by lender. A debt-to-income ratio caps total monthly debt payments at a share of gross monthly income, commonly in the region of 36 to 43 per cent depending on the market and product.
Existing debt is punished heavily by the second test. A car payment of 400 a month can reduce borrowing capacity by roughly 60,000 to 80,000 at typical rates and terms, because every pound of monthly obligation displaces a pound of mortgage payment. Clearing a car loan before applying often raises the offer by more than the loan balance itself.
What the Deposit Changes
Loan-to-value on a 300,000 property, and what each band typically affects.
| Deposit | LTV | Typical effect |
|---|---|---|
| 5%, 15,000 | 95% | Highest rates, narrowest product choice |
| 10%, 30,000 | 90% | Better rates, still limited |
| 15%, 45,000 | 85% | Noticeably improved pricing |
| 20%, 60,000 | 80% | Mainstream rates; mortgage insurance often avoided |
| 25%, 75,000 | 75% | Near the best available pricing |
| 40%, 120,000 | 60% | Best tier in most markets |
LTV bands step rather than slide, so being just above a threshold costs the whole band. Finding another few thousand to cross from 81% to 80% can be worth far more over the loan than the amount itself.
The Costs a Lender Does Not Test
Affordability assessments look at the mortgage payment and existing credit. They generally do not test whether you can also fund maintenance on an older property, a service charge that rises annually, commuting from a cheaper area, childcare, or the furniture and repairs that follow a move. Those are real and they arrive at the same time as the mortgage.
Rate risk is the other thing worth modelling yourself. On a variable or short-fixed mortgage, a two-point rise on a 240,000 loan adds roughly 300 a month. Stress-testing your own budget at two or three points above the current rate is a more useful exercise than borrowing the maximum a lender will approve, and this page is general information rather than mortgage advice.