Buying a home is an exciting milestone in life, but it comes with big financial commitments. One of the most important things to consider is what percentage of your income you can reasonably dedicate to your mortgage payments. This helps ensure homeownership remains affordable long-term.
In this article, we’ll explore the common guidelines, key factors lenders assess, and useful tips on deciding your ideal mortgage percentage.
The 28/36 Rule
The general rule of thumb in the UK is the ‘28/36 rule’ for mortgage affordability:
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Your total monthly housing costs including your mortgage payments and property insurance should not exceed 28% of your gross monthly income.
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Your total monthly debts, including your housing costs along with other bills and debts should not exceed 36% of your gross monthly income.
A lot of people in the mortgage business use this 28/36 rule as a budgeting guideline. If you stay below these limits, your new mortgage payments will be more manageable for your current financial situation.
Exceeding these percentages means lenders may have concerns about affordability and decline your mortgage application. As a guide if your total debts exceed 50% of income, approval becomes very unlikely.
What Mortgage Lenders Assess
When you apply for a mortgage, lenders carefully evaluate whether you can afford the monthly repayments. Here are the key factors they consider:
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Your earnings, such as salary, bonuses, commissions, and money you make from working for yourself Income needs to be stable and consistent.
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Using your bank statements to help you figure out what you spend every month on things like food, entertainment, travel, bills, etc.
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Existing debts – including loans, credit cards, overdrafts, child support, etc. Lenders check your credit file.
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Credit history – lenders look for a responsible repayment history without missed payments or defaults. A good credit score is important.
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Ability to afford payments if interest rates rise – lenders test affordability at higher interest rates in case fixed terms expire and rates increase.
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A lot of lenders now lend up to 5 or even 5 times your income. 5 times your annual income. So £50,000 income may qualify for £250,000-£275,000 borrowing.
Meeting the above criteria along with a sizable deposit gives the best chance of approval at a competitive interest rate.
Factors to Consider for Your Mortgage Percentage
As a guide, we recommend aiming for total housing costs between 15-28% of your net monthly income if possible. This helps account for other costs of home ownership beyond just the mortgage.
Here are useful tips on deciding your ideal percentage:
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Calculate your debt-to-income (DTI) ratio – add up all your monthly debts, divide by your monthly net income and multiply by 100. The lower the percentage the better.
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The bigger your deposit, the lower your required borrowing. This can help you access better mortgage rates to reduce monthly payments.
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Budget for home maintenance costs, repairs and expected property expenses. Keep some savings available to cover surprise costs.
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Keep emergency savings equal to 3-6 months of your net monthly expenses. This provides a buffer for unexpected mortgage repayment issues.
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Opt for mortgage terms of 25 years or less. Longer terms over 30 years mean smaller monthly payments but higher lifetime costs.
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Be conservative with your budgeting, don’t over-stretch yourself at the maximum lenders may offer. Interest rates and personal circumstances can change.
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Consider getting a lodger or room-mate as an extra income stream to help cover the mortgage.
Getting Expert Mortgage Advice
Trying to determine an ideal percentage of income for your mortgage can be challenging. Every person’s circumstances are different.
Working with a professional mortgage adviser can be very helpful for:
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Getting a better understanding of your maximum potential borrowing based on affordability.
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Identifying the most suitable mortgage products and competitive rates for your needs.
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Planning your mortgage term and ideal monthly repayment level.
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Completing the mortgage application process with greater ease and confidence.
An adviser looks at the big picture around your financial situation and goals. They help you avoid taking on too much debt and ensure your property plans are sustainable.
Key Takeaways
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Aim to keep your total housing costs below 28% of monthly income as a general rule. Your total debts should not exceed 36% of income.
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Mortgage lenders carefully assess your income, debts, credit history and affordability at higher interest rates before approving your loan.
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Take a conservative approach when budgeting your ideal mortgage percentage. Don’t over-borrow just because the maximum a lender may offer is higher.
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Getting guidance from a professional mortgage adviser can help identify the most suitable mortgage product and monthly repayment level for your unique situation.
Estimating How Much Mortgage You Can Pay
Now that you know how mortgages work, you should also know how the mortgage rate is decided. Here are all the factors affecting the rate that you could be offered by mortgage lenders:
Lenders look at a couple of things when approving your mortgage. First, they assess the down payment — the amount you are able or willing to put up front as your deposit.
It’s only natural that the larger the down payment, the lower the mortgage payments, due to a decreased principal amount. The level of interest will also decrease, as this is impacted by the total amount of the mortgage loan.
Next comes the risk part of the mortgage: your monthly income. Your disposable income determines your ability to pay the mortgage instalments. Typically, lenders are more reluctant to approve your mortgage if you don’t have sufficient disposable income to cover the monthly payments.
Fortunately, you can still get a mortgage if you have limited income. However, the lender will allocate a smaller percentage of your salary towards the mortgage repayments likely by extending the mortgage term as well as the secondary expenses.
The decision of a lender doesn’t just depend on your financial position, but it also relies on the property itself. Lenders might deny your application if they deem the property to be too expensive or risky. You can tip the odds in your favour, however, if you have an exceptional financial record and are willing to put down a substantial deposit, meaning you might get an approval.
Most lenders already have a directory of pre-approved property listings. If your property isn’t on the list, the lender might carry out a property valuation survey before granting you the loan.
35% / 45 % Rule
A similar rule is the 35% rule. Your mortgage payment limit should be 35% of your monthly gross income or 45% of your net after tax income. This rule allows you to decrease the mortgage term, though you might find yourself short on cash at times with so much in outgoings each month.
If the 28% rule still doesn’t grant you enough financial freedom, you might find the 25% rule more suitable. This rule specifies that the limit of all your debt repayments, including mortgages, credit card payments, and other loans, is 25% of your gross monthly income.
While this means you’ll either be looking at extending the mortgage term or reconsidering the property, it’s best to be over-cautious sometimes when applying for mortgages as it protects you against future changes you might face such as loss of job or an expansion of your family.
Unfortunately, you can’t just pick a property and choose the monthly instalments you’re willing to pay. Instead it goes the other way around, as lenders determine how much they are willing to lend.
For this reason, you need to understand how a mortgage is calculated. Here’s how you can calculate your monthly mortgage payments:
What Percent Of Income Should Go To Housing?
FAQ
Is 40% of income on mortgage too much?
The commonly used 28/36% rule says that your monthly pre-tax income should not go toward your mortgage payment more than 20% of the time. This includes property taxes (20%E2%80%A6Jun%2012, 202025).
Is the 28/36 rule realistic?
The 28/36 rule, which suggests spending no more than 28% of your gross monthly income on housing costs and no more than 36% on all debt payments, is a useful guideline, but not always realistic in today’s market, according to Bankrate and The Muse.
What is the ideal mortgage to income ratio UK?
28% Rule. The rule of thumb when calculating your mortgage is the 28% rule. Experts suggest that your housing costs shouldn’t exceed 28% of your net monthly salary. This includes your monthly mortgage payment, homeowner’s insurance, private mortgage insurance, and any homeowner association fees.
What is the 45% rule for mortgage payments?
With the 35%/45% rule, your mortgage payment and recurring debts should not exceed 35% of your gross income (pre-tax) or 45% of your net income (post-tax). “Aiming to stay under 40 percent for your housing costs should be everyone’s goal, ” Perez said.