How much mortgage can I afford

How it works

Banks usually grant a mortgage whose payment doesn't exceed about a third (33%) of net income, minus existing payments. From that you get the maximum amount.

Note

It's a rough estimate: the bank also weighs job stability, available down payment and other factors.

Where the one-third threshold comes from

It is not a law, it is a rule of prudence banks have applied for decades and regulators encourage. The idea is that beyond a third of net income the instalment becomes fragile: a rise in utility bills, a medical expense or the end of a contract is enough for the payment to fail. Banks call it the debt-to-income ratio, and to work it out they add up every ongoing debt, not just the mortgage.

It is why a small loan taken out for a car or for appliances reduces the amount available far more than people expect: a hundred a month of existing instalments removes, all else being equal, tens of thousands from the possible mortgage.

What the bank looks at besides the instalment

The ratio between loan and property value: almost no lender finances the whole price, and the usual ceiling is eighty per cent. So a deposit of at least a fifth is needed, on top of the costs of the deed. Then the stability of income, where a permanent contract weighs differently from self-employment started last year. Then age, because the term has to end within an age limit, usually between seventy-five and eighty.

And finally credit history: instalments paid late on an old loan stay recorded for years in credit databases, and are the commonest reason for a refusal that to the person receiving it looks inexplicable.

The money you need that is not in the mortgage

The commonest mistake of first-time buyers is to calculate the deposit and stop there. On top of it come the taxes on the deed, the notary or solicitor, any agency commission, the valuation and the arrangement fee, the tax on the loan itself, the compulsory insurance. These are paid all at once and in cash, not in instalments, and together they often come to a year's salary.

Then there is the house itself: the move, painting, appliances, the furniture that does not fit the new rooms. Anyone who arrives at completion with an empty account starts life as an owner by borrowing again, which is exactly the situation the income ratio was meant to prevent.

The maximum is not the target

This page says how much a bank is willing to lend you. It does not say how much it is wise to ask for, and the two rarely coincide. An instalment at the limit turns every setback into a crisis and locks in, for decades, the impossibility of changing job, cutting hours or facing a spell without pay.

The most honest way to use it is backwards: take the result, subtract a margin, and check that with the reduced instalment there is still room to save. If nothing is left, the house being looked at is beyond reach, even if the bank says yes.

Nearby tools

To see how each instalment is split there is Amortisation schedule, and for the effect of extra payments Early repayment. The comparison with the alternative is in Rent or buy, and the sum on take-home pay in Gross to net salary.