In this brief guide, we are going to discuss the mortgage affordability rule of thumb and what you can expect when submitting your mortgage application.

It’s important to note that while there may be a general mortgage affordability rule of thumb, different mortgage lenders may subscribe to different methods on how they measure a borrower mortgage affordability.

What is the mortgage affordability rule of thumb?

The mortgage affordability rule of thumb states that no more than 35 per cent of your post-tax income should go on your monthly mortgage repayments. If you are also unable to pass the mortgage stress test on interest rate rises then you won’t pass the mortgage affordability tests.

When looking to purchase a home, the first thing you will want to do is figure out exactly how much you are able to borrow from a mortgage lender.

There are two main ways to do this: Using your monthly disposable income and using your full annual salary as a multiple.

Using your monthly disposable income:

If you want to use your monthly disposable income then the easiest way to work out what your mortgage affordability maybe for a mortgage which you want to take out is to use a mortgage calculator, input the mortgage details which you know such as your mortgage deposit, the ideal property price and then the mortgage calculator will give you an idea of what your monthly mortgage repayments could be.

You can then use this number and subtract it from your monthly disposable income to see if the mortgage is something you will be able to afford. 

As mentioned above, the mortgage affordability rule of thumb from most mortgage lenders is that the mortgage repayments should not take more than 35% of your disposable income each month.

Using your full annual salary

You could also use your full annual salary to calculate your mortgage affordability as most mortgage lenders use this as a mortgage affordability rule of thumb.

You can use your annual salary to calculate what the maximum mortgage you would be able to get is by multiplying your full annual salary with an average mortgage multiple.

Some mortgage lenders use mortgage multiples of 4 whilst others use mortgage multiples of 5.

If you have an annual salary of £50,000 and the mortgage multiple is 4 then the maximum mortgage you could borrow would be £200,000.

It is important to note that whilst the mortgage affordability rule of thumb gives you some idea on what mortgage you could afford, it is in no way a full analysis of your mortgage affordability and hence the results cannot be trusted as being reliable.

The only real way you can ascertain what mortgage you can afford is by making a mortgage application.

The New Mortgage affordability rule of thumb

Whilst the mortgage affordability rule of thumb is still used, mortgage lenders now go through a more complicated verification process in order to determine how much a borrower can afford.

Since the mortgage market review, mortgage lenders must now carry out far stringent checks on a borrower’s true income and expenses and how they are likely to change over the coming months or years before they can come to any true conclusion on the borrower’s ability to repay the mortgage.

Do mortgage lenders still us the income multiple?

Yes, some mortgage lenders still use the income multiple when looking to determine how much you could potentially borrow but they will still perform a deep dive on your finances to understand your ability to repay the mortgage in full.

The income multiples from mortgage lenders all differ and there is no one mortgage affordability rule f thumb. 

Some mortgage lenders may use an income multiple of 3 whilst others may use income multiples as high as 6.

Example of an income multiple:

If you earned £50,000 per year then based on the income multiple you got the mortgage you may be able to afford could look like the below.

The income multipleThe maximum mortgage you could afford
3£150,000
4£200,000
5£250,000
5.5£275,000
6£300,000

:

It is important to note that whilst the mortgage affordability rule of thumb is still a guiding principle for most of the mortgage lenders, they will still go through a very thorough mortgage affordability check which will involve checking your credit score, your debts, your disposable income, your future financial plans and much more.

The amount of mortgage you can afford is also heavily influenced by how much mortgage deposit you have, the type of property you are buying and the price of the property.

How much can you afford?

To figure out how much you can afford you can use the mortgage affordability rule of thumb but you may also want to use a mortgage affordability calculator which goes into much detail and provides a better result as to your true mortgage affordability.

If you are also looking to get the best mortgage deal or the highest income multiple then you may want to speak with a mortgage broker who compares mortgages from the whole of the market.

Will mortgage lenders take your full income as part of their affordability rule of thumb calculations?

When looking at your mortgage affordability, a mortgage lender will take your full basic wage into consideration.

If you however earn other things such as bonuses, commission or overtime pay then different lenders will have different criteria as to how they view this.

Will mortgage lenders take your commission & bonuses as part of their affordability rule of thumb calculations?

When working out your mortgage affordability, different mortgage lenders have varying criteria on how they view bonuses, commission and any extra income which is derived from your job.

Some mortgage lenders may accept all of it but there are other mortgage lenders who will only accept a percentile of your bonuses or commission towards your full income when calculating your mortgage affordability.

Some mortgage lenders may accept 50% of your annual bonuses and average commission whilst others may accept as much as 90%.

If bonuses, commissions and extra pay factor significantly into your annual salary then you may want to find a mortgage lender who takes a bigger percentile of this pay into account.

Most mortgage lenders will want to see a track record of regular commission or bonus payments before they take these into account.

Will mortgage lenders take your allowance as part of their mortgage  affordability rule of thumb calculations?

Most mortgage lenders will take any allowance which is written into your employment contract as part of your mortgage affordability calculations.

Most mortgage lenders will want confirmation that the allowance is permanent and not a temporary allowance.

Does the mortgage affordability rule of thumb change if you are self employed?

No, the mortgage affordability rule of thumb does not change because you are self-employed.

Self- employed borrowers do however face a different challenge and that is proving to the mortgage lender that your income is indeed reliable.

Most mortgage lenders will want to see that the borrower has at least 3 years worth of trading history and experience in the sector in which they work.

Mortgage lenders will consider profit from your business and any salary which you draw as part of your income.

Things do fiffer a bit depending on what type of self employed route you chose.

If you are a contractor then you may find that most lenders will pay more attention to your day rate.

If you are in a partnership then you may find that most mortgage lenders will pay more attention to your share of the profit.

If you are a director or sole trader then most mortgage lenders will look into the salary you draw and the profits from your business based on your ownership.

Self employed mortgages are a niche area of the mortgage market and a self-employed mortgage broker may be best placed to advise you on your options once you are ready to apply for a mortgage.

How is the mortgage affordability rule of thumb applied to buy to let properties?

For buy to let properties the mortgage affordability rule of thumb is slightly different.

Buy to let mortgage lenders focus on the rental coverage the property has. This means how much of the income from the property covers the properties monthly expenses, including its monthly mortgage repayment.

Most mortgage lenders want a rental coverage ratio of 125%.  This means your monthly  income will need to be 25% higher than your monthly expenses (including your monthly mortgage repayment) on the property for you to be eligible for a buy to let mortgage.

The rental coverage which most buy to let mortgage lenders require will differ based on their own lending criteria but could go as high as 200%.

Buy to let mortgage lenders also have a minimum income requirement which they place on buy to let properties.

This is usually £25,000 but may be higher if you are a first time buy to let borrower.

Worried about your mortgage affordability? Use a government scheme

If you are worried about the mortgage affordability rule of thumb then the best thing you can do is use a government scheme to help you reduce either the price of the property or increase your mortgage deposit and hence make getting on the property ladder a lot easier.

Below are some of the Government schemes you may be able to use:

You can check if you are eligible for these government schemes by using a government scheme eligibility calculator.

  • Lifetime ISA– gives you a government bonus of £1,000 if you save the maximum £4,000 a year.
  • Help to buy ISA– gives a maximum bonus us £3,000 if you save the maximum allowed of £12,000. Before you get either you should consider which is better. Lifetime ISA vs Help to buy ISA.
  • Help to buy equity loan- gives you up to 40% as a 5-year interest-free equity loan. You begin to pay interest at 1.75 % after the fifth year and 1% plus RPI for every year thereafter.
  • Shared ownership- You can buy between 25% to 75% of the property initially with a shared ownership mortgage and then buy more using a staircasing mortgage.
  • Armed forces help to buy- similar to the help to buy equity loan but specific for the armed forces personnel giving them an increased chance of acceptance.
  • Rent to buy- This is the right to buy scheme on which this guide is currently discussing. A different marketing name is just used. Watch out for this when shopping to avoid missing out on eligible properties due to confusion.
  • Right to buy- allows you to buy your home at a discount price.
  • Preserved right to buy- same as above.
  • Right to acquire- same as above.

Depending on where you live, you may also be able to take advantage of home buying schemes provided by your local council. Example: In Norwich, the local councils provide the Norwich home options scheme.

Worried about the mortgage affordability rule of thumb? Use a mortgage broker

Mortgage brokers are important as they can access mortgage products from across the whole of the market in some cases.

This could be over 11,000 mortgage products. This may have some advantages rather than going directly to a mortgage lender.

A mortgage broker will look to understand your financial circumstances and then provide recommendations on which mortgage products may be suitable for you based on your mortgage affordability.

After giving you these mortgage recommendations, most mortgage brokers will seek your consent to apply for a mortgage in principle. 

This will allow you to shop for your home easier as more estate agents and sellers may take you seriously or it will give you confidence that your mortgage is indeed a possibility before you make a full mortgage application. 

Once you have found a home you want to buy and are satisfied with the mortgage offer for your mortgage then the mortgage broker will then look to get you a mortgage offer.

This will come with a key facts illustration document which details out the features of your mortgage including how much you will pay per month.

It will also contain information on if there are any limits such as early repayment fees, or annual overpayment limits.

If you are happy with everything you can then go on to secure your mortgage with the help of a conveyancer.

Your conveyancer will manage the legal searches on the property to ensure there aren’t any issues with it.

They will oversee the sales agreement to ensure it is in your best interest, they will manage the transfer of mortgage funds, exchange contracts with the seller or their conveyancer and set a completion date with the seller or their conveyancer.

FAQs: Mortgage affordability rule of thumb

What is the 28 36 rule?

The 28/36 rule is a financial rule which states that a household should only spend a maximum of 28% of their gross monthly income on the total house expenses and no more than 36% of their gross monthly income on paying off monthly debts such as the mortgage payment, car loans etc.

How do you pass the affordability test?

To pass an affordability test you should:

  • Have a good credit score
  • Have little or no debts
  • Have a good disposable income which covers your future credit payments comfortably
  • Have a good deposit
  • Ensure you are on the electoral roll

What percentage of your income should be your mortgage?

The 28% financial rule states that you should only spend a maximum of 28% of your gross monthly  monthly mortgage repayments.

In this brief guide, we discussed the mortgage affordability rule of thumb and what you can expect when submitting your mortgage application.

John Bate

John has 22 years of experience in financial services. This spans across financial research, financial services (As a qualified mortgage broker and underwriter), financial trading and sales at global investment banks. While working as a publishing research analyst, he covered European bank credit and advised institutional clients on investment strategies at both JP Morgan and Societe Generale. John has passed all three levels of the CFA (Chartered Financial Analyst) programme.