Mortgage Affordability for First Time Buyers

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When it comes to buying your first home, it can be difficult to know what funds you actually need to be able to afford your first home.

In this guide, we’ll discuss what mortgage affordability criteria are, what elements lenders look at when determining how much you can borrow and what you can do to increase your mortgage affordability. 

Understanding mortgage affordability criteria

As a first time buyer, you may be confused by what the affordability criteria actually is. The Financial Conduct Authority (FCA) requires mortgage lenders to assess whether applicants can afford to repay their mortgage loan.

The consequences of taking out a mortgage that you can’t afford can be extremely serious, which is why it is essential for mortgage lenders to conduct their own affordability tests. 

Affordability criteria can vary from lender to lender, but it is predominantly based on your income and outgoings. 

How much can you borrow as a first time buyer?

Lenders will assess affordability based on their own criteria, meaning each one has a slightly different process. You will likely find that some lenders will be more willing to offer you a mortgage than others. 

The general rule of thumb is that you will be able to borrow 4-4.5 times your annual income. However, if you are a strong applicant and find the right lender for you, you may be able to borrow up to 5 times your income. 

For example, if your income is £30,000, whether this is joint or by yourself, you’ll likely be able to borrow £120,000 to £150,000. 

How mortgage affordability is calculated

To calculate your mortgage affordability, lenders will want to know how much money you have coming in each month and what it is being spent on. This way, they can get a general overview of your finances and whether you will be able to repay the monthly repayments. 

The three key factors a lender will look at are:

  • Your credit score and history – This gives a good indication of how you manage your money and pay your bills. Your credit score is ranked and it will be classed as: excellent, good, fair, poor or very poor. This rating will give lenders an understanding as to whether you will be a reliable borrower or not.
  • Personal income – Lenders will also need to know the amount you earn. This, alongside any bonuses or tax credits, will help lenders offer you a mortgage that you can afford to repay.
  • Your outgoings – Mortgage lenders can be harsh and will more than likely scrutinise how much of your monthly income you spend. This helps them to understand what financial commitments you have, such as childcare and car finance, and evaluate the size of your deposit and how it was accumulated. 

Your lender will also look at any outstanding debt that you may have, such as loans and credit cards. The lender will want to see proof that the cost of repaying this debt will not impact your ability to repay the mortgage loan. 

How to increase your mortgage affordability as first time buyers

There are many factors that can affect how much a lender is willing to offer you as a first time buyer, from a lower than average income to debt. However, don’t panic just yet, there are some ways you can increase your mortgage affordability as a first time buyer. 

Clear your existing debts 

When you’re applying for a mortgage, the amount of debt you have can affect how much you will be able to borrow. Before you consider applying for a mortgage, you should focus on repaying your existing debts, such as cars on finance or any outstanding credit card debts. 

However, you don’t need to have them fully paid off. Ideally, you should look at keeping your debts below 25% of your available credit. This will help to give the lender confidence that you’re handling your budget correctly and that you can repay any debts you may have. 

Build a money saving plan

Being able to show you can repay your debts is one thing, but showing that you can save your money is another and it is something that many lenders will be attracted to. 

The bigger the deposit you can save, the easier your mortgage will be to repay since you will be paying a larger amount upfront. 

Use other people to boost your affordability 

Although it might sound strange, you can actually use other people to boost your mortgage potential. 

A guarantor mortgage can help to increase your borrowing capabilities since the person acting as the guarantor must agree to make the repayments if you can’t. This helps to give lenders the security they need to ensure they won’t be out of pocket if the mortgage payments can’t be made. 

Use a mortgage broker to find the best deal 

When you enlist the help of a mortgage broker, all the hard work is done for you. 

Mortgage brokers, such as ourselves at Barlow Irvin, work by comparing deals from a wide variety of different lenders and can sieve out the best offers for you and your financial situation. 

We can also help explain every step of the process to you, helping you to understand how your affordability is assessed, what implications your credit score has on your affordability and how else you can increase your affordability. 

About the author 

Gary Oxborough

Gary is the Founder and Director of Barlow Irvin Financial Services Ltd. He has been in the Finance industry for over 20 years and has specialised in Mortgages since 2003. As well as running the firm, he is still actively involved in advising clients.

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