How much can I afford?
You’ve decided you want to buy a home, and you believe that you can afford it. But before you even start looking at properties, you need to decide what price range you can afford. You probably want to buy as much house as possible, but obviously don’t want to end up overstretched – or repossessed. There are so many factors to consider, that many homeowners do their sums wrong, and accidentally end up out of their depth
The basic principles
When buying a home, most people naturally want to buy as much property as they can afford, given their income and deposit. On the other hand, you can severely regret overstretching yourself, leaving you with too little money to do any work to the house or to pay the monthly bills (let alone holidays). In the worst case scenario, hundreds of thousands of people end up falling behind with their mortgages, and risk having their homes repossessed.
How much you want to stretch yourself will depend on:
- How much you expect moving and building costs to be
- What your standard of living and monthly outgoings are. How much money do you need a month?
- How confident you are that you won’t lose your job – and will get pay rises
- What your expectations are in terms of house prices and mortgage rates – are they going up or down?
- Whether you are happy being “house poor”, with a big house but little disposable cash
- What safety net you have in terms of savings – or family support
- What your appetite for risk is. Some people just like living close to the edge, while others need more reassurance. Appetite for risk is often linked to responsibility – single adults are often happier to take risks than couples with lots of children and grandparents to care for
What is my overall budget?
First, you need to work out your overall budget – how much money you have at your disposal to pay for everything. This will depend on the capital you have at your disposal, and how much you can borrow against the property as a mortgage.
The capital you have depends on:
- What savings you have
- What support you get from your family (perhaps by them extending their mortgages). See our guide for parents on How to help your child buy a home
- What capital you can raise from selling an existing home, or extending a mortgage on a property you are not selling
- Any government support. See What help can I get from the government?
- What unsecured loans you raise, for example credit card debts. We strongly recommend against this. If your move depends on building up credit card debts, you are over-stretching yourself
From this total capital, you need to deduct any costs of buying, moving and building, as well as the savings safety-net you want to keep (you will need to have some savings after you move, in case of emergencies). This leaves you with the deposit that you feel you can afford to put down towards the cost of your home.
Read more about the Hidden Costs of Buying and Owning a Property
How much you can I borrow?
The size of your mortgage will depend on:
- The size of your deposit. There are an increasing number of 95% mortgages out there. Ideally, your deposit would be at least 10% of the value of the property (and often more), so the size of your deposit limits how much you can borrow.
- How much outstanding debt you have from other lenders (e.g. bank loans, credit card debts)
- Your income. Some banks can lend up to five times salary, although these are maximum figures. Lenders all have slightly different ratios, taking into account joint incomes, bonuses etc.
- The stability of your income. If you are freelance, just set up a new business, or have unpredictable income, then mortgage lenders will usually only be prepared to offer you smaller mortgages
What should I do if the lender refuses to give me a big enough mortgage?
Mortgage lenders can’t win: they get criticised by homebuyers for not lending them enough, and by everyone else for lending homebuyers too much, creating property bubbles and putting overstretched homeowners at risk of repossession. They are not charities, and make money from lending, so they want to do it; if they aren’t lending to you, they have strong doubts about your ability to pay back the mortgage. These doubts may not be well founded, but if various mortgage lenders are refusing to give you the size of mortgage you want, it is a good indication you are over-stretching yourself, and should scale down your aspirations rather than desperately search for the one lender prepared to give you what you want. It is not in your interest to have your home repossessed.
How much will the total cost of buying my home be?
To work out how much you can afford you will have to work out:
- The total purchase cost. On top of the house price, you will have to pay for stamp duty, conveyancing, surveying, mortgage fees etc, which can all add up to 7% onto the house price. See The hidden costs of buying and owning a home
- Don’t forget the estate agent fees you have to pay if you are selling your existing home
- The cost of moving. This isn’t just the moving van, but new bed, fridge etc. On average, home movers spend £5000 on new goods. You need to factor this in if you are not keen to sleep on the floor until you have saved up for a bed. See The hidden costs of buying and owning a home
- The cost of building works. What are the emergency works you have to do that can’t be put off – such as getting the boiler to work?
So – how much can I afford?
You should have worked out how much capital you have to play with and how much you can borrow from a mortgage lender (both being your total homebuying budget) – and to state the obvious, that needs to cover the total cost of buying your home. If not, scale back your ambitions – or find some more money. But being able to afford to buy your new home is only the first step – to avoid repossession or mounting debts, you need to be able to afford to live in it.
Will I be able to afford to pay my mortgage and other household bills?
Once you have decided the rough size of the mortgage you are going for, you should find out what the rough monthly costs would be, which will depend on the type of mortgage (see What type of mortgage should I get?).
- Is the monthly mortgage a payment you can easily afford? A good rule of thumb is that no more than 35 per cent of post-tax income should go on mortgage payments.
- Will the mortgage be more or less than your current rent? If it you are struggling to pay your rent, and the mortgage is more – think again
- Will there be bills – such as council tax, water or insurance – that you are currently not paying? These can add up to thousands of pounds a year (out of your post-tax income)
- What happens if interest rates go up, by 1, 2 or 3%? You need to stress test the mortgage for different scenarios. If you can’t afford an increase in interest rates, you need to get a fixed rate mortgage, which will normally increase your monthly mortgage costs
- What happens if you lose your job, or suffer a fall in income because you have children and go on maternity leave? If you are planning kids, you can’t plan on the basis of dual-income-no-kids lifestyle
- Can you cover basic maintenance costs of a house? Many new homeowners struggle to pay the always surprisingly large wear and repair costs that go with owning a home (but not renting one)
Can I get government help?
You might be able to get government help if you are a first time buyer or if you used to own a home but now cannot afford to. See What help can I get from the government? for more information.
Mortgage Best Buys
- Six steps to getting your first mortgage
- The HOA Step-By-Step Guide to Buying a Home
- Top tips: How to save for a deposit
- How to improve your credit rating before getting a mortgage
- How the government can help you buy a home. An overview of schemes
- Top Tips – clever questions to ask the estate agent
- How do I know I’m not paying too much?
- The legal side of buying a home explained