The Rising Cost Of Living: Mortgage Affordability Secrets

The rising costs of living and housing prices have made it increasingly difficult for people to get on the property ladder and afford a house. While the traditional rule of thumb is that people can afford a mortgage that is 2-3 times their gross income, this is becoming less realistic as house prices soar. In the UK, the average house price is £230,000, while the average household income is around £25,000. This means that for many, affording a house involves careful saving and investing, making compromises, and considering government schemes and shared ownership options.

Saving a large deposit

Saving for a large deposit can be challenging, but it is possible to achieve with discipline and smart planning. Here are some strategies to help you save for a large mortgage deposit:

Set Clear Goals and Research

Start by setting clear goals and understanding the market. Research the property market to determine the average cost of your ideal home. Utilize property websites and mortgage calculators to gain a realistic picture of how much you need to save. This initial step will help you create a structured savings plan.

Reduce Expenses and Increase Savings

Examine your monthly expenses and identify areas where you can cut back. This may include reducing discretionary spending, eating out less, and negotiating lower bills. Downsizing your current living situation, moving to a house share, or getting a housemate to split bills and rent can significantly boost your savings rate.

Utilize Government Schemes and Family Support

Take advantage of government schemes like the Help to Buy or Scotland's LIFT scheme, which offer equity loans and shared ownership options, making it easier to purchase a property with a smaller deposit. Additionally, consider buying with a partner or family member, as this can make saving for a deposit more manageable. Some people may also receive financial support from their families, whether through cash gifts or family members acting as guarantors.

Choose the Right Savings Account

Opt for a savings account that offers a competitive interest rate. Fixed-rate savings accounts often provide more favourable interest rates but require you to put your savings away for a longer term. ISAs can also be a good option, but ensure they align with your timeline for accessing the funds.

Seek Professional Advice

Speak to a mortgage broker or advisor who can guide you through the process and provide personalized advice based on your circumstances. They may have access to exclusive rates that can benefit you.

Using a mortgage calculator

To use a mortgage calculator, you will need to input details such as your annual salary, any existing debts or financial commitments, the desired loan term, and the interest rate. You will also need to enter the ZIP code for the property, as the calculator will require the ZIP code and the county in order to identify the right property tax rates. Once you have entered all this information, the calculator will provide you with a range of home loan options and estimates.

It is important to remember that the calculator's results are only estimates and should not be considered a final mortgage offer. Mortgage lenders will conduct their own assessments based on their specific criteria and policies. Therefore, it is always advisable to consult with a mortgage advisor or broker who can guide you through the mortgage application process and provide personalised advice based on your individual circumstances.

A mortgage calculator can also help you weigh different down payment scenarios and how they will affect how much you borrow and pay. You can use the calculator to learn how extra payments can impact how quickly you repay the loan and any interest savings. Additionally, you can use the calculator's amortization schedule to determine when you will hit 20 percent equity, which is the amount you need to request that your lender remove private mortgage insurance (PMI).

Overall, a mortgage calculator is a valuable tool that can help you understand your monthly payments and make informed decisions about your home loan options.

Affordability criteria

The criteria include a set of rules put in place by the Financial Conduct Authority (FCA) in the UK, which individual lenders may interpret in their own ways. One of the main affordability rules is the "income multiple" rule, which states that the maximum mortgage amount a borrower can be approved for is based on a multiple of their income. For example, if a borrower earns £50,000 per year and the income multiple is 4, the maximum mortgage they can receive is £200,000. This rule is based on the general guideline that people can afford a mortgage that is 2-3 times their gross income.

Another important affordability rule is the "stress test" rule, which requires lenders to assess whether a borrower would still be able to make mortgage payments if interest rates were to rise. Lenders must use a higher interest rate than the one the borrower has applied for in their stress test calculations. The "affordability assessment" rule also requires lenders to assess a borrower's income, monthly expenses, existing debt, credit score, and other debts before approving a mortgage. This helps ensure that borrowers will have enough money left over to cover their living expenses and other debts.

In addition to these rules, lenders may also consider a borrower's personality and lifestyle when determining affordability. Some people may be comfortable with higher payments and taking on more debt, while others may prefer a more conservative approach. Lenders will also assess borrowers' credit history and financial management skills to determine their creditworthiness.

To get a clearer picture of affordability, prospective homeowners can use online mortgage calculators, which take into account financial information such as annual salary, existing debts, desired loan terms, and interest rates to estimate the maximum mortgage amount. These calculators provide estimates, and it is still advisable to consult with a mortgage advisor or broker for personalised advice and guidance through the application process.

Lifestyle changes

Affording a mortgage is becoming increasingly difficult for many people due to steep rises in house prices and living costs. However, there are some lifestyle changes that people can make to help them afford a mortgage.

Firstly, it is important to carefully assess your financial situation and create a realistic budget. This involves calculating your income, expenses, and any existing debts or financial commitments. Online tools and mortgage calculators can help individuals determine the maximum mortgage amount they may be eligible for by inputting their financial information. It is also crucial to consider additional expenses associated with buying a house, such as legal fees, surveys, valuation costs, and stamp duty.

Secondly, saving for a larger deposit can help individuals secure better mortgage deals with lower interest rates. While the average first-time buyer puts down a 15% deposit, some lenders offer mortgages with lower deposit requirements, such as 10% or 5%. However, a lower deposit often results in a higher loan-to-value ratio and, consequently, a higher interest rate on the mortgage. Therefore, planning and working towards a higher deposit can be beneficial.

Additionally, individuals can make lifestyle changes by reducing discretionary spending, eating out less frequently, and negotiating lower bills. This may involve cutting back on non-essential purchases, such as expensive wine, designer clothing, or frequent dining out. Some people may also consider moving to a more affordable area or commuting to work to save on housing costs. It is worth noting that high earners tend to have more opportunities to save due to their higher disposable income, but they may also adjust to a higher standard of living, which can hinder their savings.

Lastly, individuals can take advantage of government schemes, such as the Help to Buy scheme, which provides equity loans and shared ownership options, enabling people to purchase a property with a smaller deposit. Shared ownership allows individuals to buy a share of a property, usually between 25% to 75%pay rent on the remaining share. Over time, they can gradually increase their ownership share. These schemes are especially beneficial for those with low salaries who want to get on the property ladder.

Government schemes

The UK government has several initiatives to help first-time buyers and current homeowners with their mortgages. Here are some of the government schemes available:

Help to Buy Scheme

The Help to Buy scheme provides equity loans and shared ownership options, enabling individuals to purchase a property with a smaller deposit. This scheme is currently only available in Wales. Under this scheme, the government provides an applicant with an equity loan of between 5% and 20% (40% if in London) of the property's value, while the buyer puts up at least 5%. The loan is interest-free for the first five years, and there are no monthly payments. The Help to Buy ISA is closed for new applications, but those who had active ones before the initiative ended can still claim the government's 25% bonus (minimum £400 and maximum £3,000).

Shared Ownership Scheme

With the Shared Ownership scheme, individuals can purchase a share of a property (usually between 25% to 75%) and pay rent on the remaining share. Over time, they can gradually increase their ownership share through a process called "staircasing". This scheme allows people to get on the property ladder with a lower initial investment.

First Homes Scheme

The First Homes scheme helps first-time buyers purchase a new-build property at a discounted price in England. Local authorities can advise if an individual qualifies, confirm the discount that may apply, and provide other scheme rules.

Mortgage Guarantee Scheme

The Mortgage Guarantee Scheme is similar to a 95% mortgage but with extra government support. Buyers start with a deposit between 5% and 9% of the home's price, and the lender provides a mortgage for up to 95% of the home's value.

Frequently asked questions