Affordability matters – if you’re looking for a new home it’s likely you want the best price possible, but you may need to know where to start. Looking at your own finances will help you figure out what you can afford to buy, what monthly mortgage payment you can pay each month and whether you’re likely to be accepted for a mortgage.
Then we’ll look at where your decisions can change what you need to pay, and what other costs you might have forgotten.
If you’re a first time buyer
When considering buying your first home and how much you can budget for, it will come down to a few main things:
How big is your deposit?
The bigger a deposit you have saved up, the more options you’ll have when it comes to choosing a property. For most, a 10-15% deposit is standard, with 20% of the property value being ideal. Some government schemes for first time buyers, and some mortgages, will allow a 5% deposit, but there can be drawbacks. For example, with the
Help to Buy Equity Loan Scheme you can get a supplementary government loan on top of your mortgage, which is interest free for 5 years, but these can only be used on new build properties.
If you’ve found a mortgage that accepts a 5% deposit, the rates may not be as good as if you had a larger deposit.
Task:
Consider how big your deposit is, and if you can add any more to it. If you are saving long term, a Help to Buy ISA or Lifetime ISA give you a government bonus for saving.
Are you a good bet?
If you’re getting a mortgage, you’ll need the lender or bank to see you as a good option to receive that money. They need to know you’re likely (and able) to pay it back.
Debts – if you’ve got significant debts, it’s worth clearing these up first. A lender isn’t likely to give you a mortgage if you already have a lot of money to pay back. Work to clear any debts you can before you apply for a mortgage.
Credit score – it’s easy to check your credit score to see how a lender would view you. Using an app like
Clearscore can identify any issues with your credit report and give you tips to build it up. The higher credit score you have, the more likely you are to get a good deal on a mortgage.
Owning on finance – if you have a lot of items on finance, like a sofa or a car, it can be seen the same way as a debt. It’s worth paying off as many financed items as you can before approaching a lender for a mortgage.
What can you afford per month?
It’s not just a case of looking at your deposit and getting a mortgage. Mortgage underwriters will consider two other things when they look at your application:
The x 4.5 rule – to avoid lending too much to people who can’t pay it back, lenders will generally only lend 4.5 times your annual income. This means that you’ll be able to get a bigger mortgage if you’re buying with someone else, as you can combine your incomes.
Your monthly spending habits – if you’re always in the red by the end of the month, or all of your money is going to the pub, restaurants and nights out, your may be seen as a risky choice by the lender. Underwriters don’t always look at your bank statements, but if they do they often go a few months back. So try to make sure your accounts are in order.
Monthly mortgage payments – it used to be that mortgage payments were significantly cheaper than rent, and now that isn’t always the case. You can work out what your mortgage payment might be per month using a mortgage calculator, and bear in mind that the length of the mortgage term will have an impact. For example, getting a 30 year mortgage instead of a 20 year mortgage will lower your monthly payments, but you’ll pay more in interest over a longer term.
If your mortgage payment is too high, it can put you at risk of getting into debt, and falling behind on your mortgage. That’s why the underwriters look at your bank statements. Make sure that whatever mortgage you are accepted for is a workable monthly payment that won’t put you under pressure.
We recommend speaking to the Mortgage Advice Bureau, who are experts in helping you find a mortgage that's right for you.
Working out what price property you should consider as a first time buyer:
If you’ve got a deposit, don’t have debts or items on finance to pay off, you know your credit score and are ready to start looking at properties, start with your annual income.
If you earn £25,000 a year and your partner earns £19,000 a year, you have a combined annual income of £44,00. Multiply this by 4.5 and the lenders are likely to give you: £198,000.
Now add whatever your deposit is to this, and that’s the amount to stay within when looking for properties. So if you had a deposit of £20,000 saved, you could look at properties priced around £218,000.
You may decide you want to grow your deposit a little more to give you more options if there are not many properties in your price range and you want to up your budget.
If you’ve got a home to sell
If you’re selling your existing home to buy another, what you can afford will depend not only on your income as above, but how much equity you have in your home. If you’ve paid quite a fair bit off your existing mortgage, you will have more money to make use of when you buy a property.
For example, if your current home is worth £250,000 and you have paid off £55,000, that equity can be added to or used in place of your deposit, as it is your stake. The rest of the money from the sale will go to the mortgage lender.
The same rules then apply with the 4.5 rule and basing it on your income, but as you have already been paying a mortgage, you may find yourself in a better situation with more competitive mortgage offers.
Bear in mind that dependent on the market, you may not get your asking price for your existing home. Work out the minimum price that you can afford to receive from your property and don’t accept an offer lower than that. Don’t forget that your estate agent will take a percentage of the sale, so factor that in.
Where are you buying?
If you’ve got a specific area in mind, that’s likely to impact your budget. Consider the budget you worked out using our questions above and see whether that matches up with the types of property you’re looking for in the area you want.
If it doesn’t, there are compromises to be made. You can either make changes to the location you want to live in, or the type of property, or you can wait to buy, growing your deposit a little more, or increasing your income to give yourself more options.
Compromising on location
If the area you want isn’t within your budget, you can expand the search radius, or move further away from amenities that might bring the price up. Often properties near public transport cost a little more, but if you don’t need that, then choose further out and pay less for it.
Widening your search to nearby areas may mean a big difference in price, even from only being 10 minutes further out.
Similarly you may find a different area entirely is a better option, because it’s similar in terms of amenities, schools, transport and other opportunities.
Compromising on property type
If you are definite about the area you need to live in, perhaps for work or family reasons, then you can adapt the type of property to fit your budget. Flats are usually cheaper than houses, and
leasehold is cheaper than freehold (though do be aware of ground rents and other associated costs).
You could choose a property that requires a little more work (but again, price up the works that need to be done and always
get a survey on the property to be aware of the possible issues) or one without some particular advantages – properties without parking or a garden are usually cheaper, and if this is not a priority for you then make the most of it!
You could also choose a house that may not be exactly what you want now, but has the possibility for expansion into the back garden, allowing more space for an extra room or bigger kitchen.
Other costs you might forget
It’s not just a case of your deposit and your monthly mortgage payment – there are lots of costs associated with buying a house that it’s easy to forget.
Whether you hire a removals team or move your stuff yourself, you’ll still be paying for conveyancing, a survey, estate agent fees (if you’re selling) a mortgage arrangement fee,
Stamp Duty (unless you’re a first time buyer – there are some exemptions) and others.
To be prepared, use our
Moving Cost Calculator to find out what you need to pay in advance.
Working out your budget
Whilst there are lots of things you can consider when working out your budget, it comes down mainly to the 4.5 rule, which will determine if you can borrow enough, the size of your deposit, and what you want for your money.
Researching on property portals and being realistic about what kind of properties are within your price range will mean you’re prepared to find the best possible home for you.
And don’t forget to
negotiate! You may be able to get more for your money than you’d think!