How much can I borrow mortgage? Mortgage calculator, rates and affordability explained as interest rate rises

Both the cost of living crisis and Bank of England’s decision to raise interest rates have made it crucial to understand what mortgage you can afford

Monthly mortgage payments are set to increase for millions of UK households after the Bank of England raised interest rates to 1.75%.

As well as announcing the change to its base rate, the country’s central bank also announced forecasts predicting inflation will top 13% in October 2022 and that a recession is on the way.

These factors will come as bad news to homeowners already struggling to manage the cost of living crisis.

Not only is inflation denting their purchasing power, but recessions tend to lead to higher levels of unemployment.

With a major UK cost of living crisis, it’s vital to know what you can afford (image: AFP/Getty Images)

The housing market could also struggle as a result of this bleak economic picture.

So, how can you find out what mortgage you can afford - and how is it calculated?

Here’s what you need to know.

How are mortgages calculated?

Mortgages are calculated by looking at your employment status, income and outgoings.

Lenders will want to assess whether you can keep up with your monthly mortgage repayments.

Your income includes:

  • Your salary
  • Income from pensions or investments
  • Income from child maintenance payments and financial support from ex-spouses
  • Any other earnings – including overtime, commission or bonuses from your job, as well as any other jobs you have.

To assess your income, lenders ask for payslips and bank statements that act as evidence of your income.

The Bank of England has increased the base rate to 1.75% (image: AFP/Getty Images)

Self-employed people also need to provide business accounts, income tax details and tax returns dating back up to three years.

Your outgoings include:

  • Credit card repayments
  • Maintenance payments
  • Insurance - such as for building, contents or travel
  • Any other loans or credit agreements you have
  • Utility bills

The lender may also require you to estimate other living costs, like how much you spend on clothes or recreation.

They are also highly likely to take your credit score into account, so it’s worth ensuring you have checked it and are happy that it accurately reflects your financial situation.

Mortgage affordability rules changed in August 2022 (image: Getty Images)

“Your income multiple, additional income and outgoings will all impact a lender’s decision with regard to how much they will offer you in the form of a mortgage,” says Almas Uddin, founder of mortgage broker company Revolution Brokers.

“Using this information, they will carry out an affordability assessment, but they will also stress test your repayment ability.

“This ascertains whether or not you will be able to cope with your mortgage repayments in the events that the monthly cost increases, or if there is a change to your income, for example if you lose your job, change professions, or have a child.”

The way mortgages are calculated has changed this month.

As of 1 August 2022, lenders no longer have to undertake a stress test when determining mortgage affordability after the Bank of England changed the rules.

This mechanism was an analysis of a prospective borrower’s ability to repay their mortgage in the event of a major change to their income or outgoings, such as the birth of a child.

Instead, they only have to conform to the loan-to-income (LTI) limit.

This limit caps the number of mortgages that can be granted to borrowers at LTI ratios at or greater than 4.5.

The LTI rate tends to govern how much mortgage you can borrow (image: Getty Images)

It is designed to protect lenders from collapsing if too many borrowers cannot repay their loans - an issue that was a feature of the 2008 financial crash.

The Bank of England said ditching the test would retain an “appropriate level of resilience to the UK financial system” while also making mortgage rules “simpler, more predictable and more proportionate”.

However, Gemma Harle, MD at Quilter Financial Planning, said at the time that the change could make it harder for first time buyers to get on the property ladder as it would fuel house prices.

How much can I borrow for a mortgage?

According to Revolution Brokers, you will generally be able to get a mortgage worth between four to six times your annual income.

So, if you and your partner earn a combined total of £50,000 a year, you will probably be able to get a mortgage of at least £200,000.

However, if you have substantial savings that can act as a deposit, or you’re able to use a government scheme like Help to Buy, this rule might not apply to you.

Also, if you’re able to extend your mortgage over a longer period, it can make it easier to borrow - although you would end up paying more overall due to the interest payments on top of your loan.

There are several ways you can boost your mortgage (image: AFP/Getty Images)

These interest payments are there so that the lender is able to recoup the value of the money you have borrowed from them.

The government has said it is considering introducing extra-long-term mortgages to open up the housing market to more people.

What is a mortgage calculator?

Short of going through a mortgage brokerage process, a way to roughly work out how much mortgage you could afford is to head to a mortgage calculator.

Publicly owned financial advice website Money Helper has a calculator you can use.

Money Saving Expert and Which? have mortgage calculators.

But not all comparison sites will give you the same results, so it’s worth getting a few estimates to understand what range you’re looking at.

How can I boost the mortgage I can borrow?

Industry expert Almas Uddin says there are several ways you can maximise the amount of mortgage you can borrow.

Get a decent mortgage broker

“A good broker will help you get the most competitive rates and pricing, as well as suggesting the best possible mortgage products to suit your individual situation,” he says.

“Ideally, you want to opt for a whole-of-market broker as they have access to every product on the market at a given time.

“All too often, buyers go straight to their bank as they are a familiar face, but in doing so they can seriously limit the options open to them.

“As a broker also deals in volume, lenders will often offer them more favourable rates and so a good broker is certainly able to determine the quality of the mortgage you can secure.”

Have a financial spring clean

“Clear your debts, close any accounts that are surplus to requirements to streamline your credit footprint, do what you can to improve your credit rating and if you’re in line for a pay rise, hold out for it until you apply,” Mr Uddin recommends.

“You can also use a budget planner to stay on top of costs and save consistently to demonstrate signs of financial responsibility.”

Avoid major life changes when applying for a mortgage

“Changing employment or becoming self-employed before applying, splashing out on a major purchase such as a new car and co-signing on a loan for someone else could impact your mortgage affordability - especially in the current climate”, Almas Uddin says.

“Multiple new searches on your credit report can also be damaging, such as new credit cards or bank accounts.

“Borrowing too much, having existing outstanding debts and even major lifestyle changes such as having children can also work against you.

“It probably goes without saying, but any recent defaults or county court judgements are also a big red flag.”