What Percentage of Salary Should Go to a UK Mortgage?

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When buying a property, a mortgage will typically be involved, as most people don’t have sufficient funds themselves for an outright purchase. While people will look to save up for their deposit, the longer term outlay will be on repayments over the term of the mortgage. This begs the question: what percentage of salary should go to a UK mortgage each month?

Typically, most people are going the cautious route, putting only 25% to 28% towards their mortgage payments. Still, some people prefer to pay off their mortgages quicker, so they dedicate 35% of their gross salary to the loan.

In this guide, you’ll learn everything about loans and how you can calculate the best monthly payments to fit your financial situation. Let’s dive in!

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Understanding Mortgage Payments

If you’re purchasing property, paying a mortgage isn’t as simple as dividing the value of the property by the mortgage time. Instead, you need to understand the core components of a mortgage:

Principal

The most essential part of a mortgage is the principal repayment. This is the percentage of each mortgage repayment that settles the principal balance.

Typically, the principal amount starts low and gradually increases over time.

Interest

The second aspect of a mortgage is, naturally, the interest. Lenders must charge interest. Otherwise, they gain nothing by granting you the loan.

Additionally, interest keeps mortgage enterprises alive, allowing them to continue giving out loans.

Insurance

If the property sustains any damage, all your mortgage payments will be lost. Well, that’s where insurance comes in handy.

Insurance protects your assets against accidents, as well as protects the lender’s interests if you fail to repay the loan.

The insurance amount is calculated based on the property value and the risk. So, if you have a low credit score, you might still get a mortgage. However, you’ll need to pay a larger sum due to insurance.

Tax

Stamp duty may be payable when purchasing a property but this will depend on the value of your property. It is usually possible to add Stamp Duty to your mortgage, but this will incur interest over the length of the mortgage and will affect your LTV ratio.

What Percentage of Salary Should Go to a UK Mortgage?

Assessing mortgage affordability is a crucial part of getting a mortgage. Even if you get the best mortgage deal, you don’t want to bite more than you can chew.

Therefore, you should take a close look at your expenses, debt, and income before getting a loan.

Since most mortgages consist of monthly payments, it’s recommended to analyse your monthly salary rather than your overall financial situation.

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 gross salary.

This includes your mortgage payments, homeowner’s insurance, private mortgage insurance, and any homeowner association fees.

Then, you should leave an additional 8% for all your debt, such as credit cards and student loans. Once you put aside 36% of your salary, the rest should be sufficient for daily expenses, an emergency fund, and even extra savings.

35% / 45 % Rule

A similar rule is the 35% rule. Your mortgage payment limit should be 35% of your gross income or 45% of your net income after paying taxes.

This rule allows you to decrease the mortgage term, though you might find yourself short on cash at times.

25% Rule

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 cards, and other loans, is 25% of your gross 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.

Mortgage Calculation

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! 

For this reason, you need to understand how your monthly mortgage works. So, here’s how you can calculate your monthly mortgage payments:

  1. Estimate the Loan Amount

Mistaking the property value for the mortgage amount is a common mistake. Yet, it’s important to understand that the loan amount is different from the property value.

To simplify, a house mortgage actually means that the property is sold completely, with the seller receiving the full property value.

As a borrower, you participate with the down payment and borrow the rest from the loaner. As such, to calculate the loan amount, you should subtract the down payment from the property value.

  1. Figure Out Interest Rate

Mortgage rates are constantly changing, depending on market conditions. 

Lenders offer different rates and programs based on the borrower. Typically, mortgage businesses have distinct programs for the following borrowers:

Accordingly, you can get a rough estimate of the interest rate the loaner might offer you based on your demographic. The mortgage’s LTV also plays a crucial role in estimating the interest rate.

  1. Decide on a Mortgage Term

Extending your mortgage terms is the best option for individuals with a limited budget. Additionally, a longer mortgage term results in lower interest rates.

While extending the mortgage term means you’ll pay less each month, so you should be able to make ends meet, it also means more interest. Accordingly, you’ll be paying more overall.

  1. Calculate the Monthly Payments

Lastly, you can use our online mortgage calculator to find out your potential monthly payments. 

While the monthly payment calculation is complex, you can still calculate the amount on your own by substituting the following formula: 

Payment = P*((r(1+r)^ n)/((1+r)^ n-1))

P is the principal loan amount, r is the annual interest rate divided by 12, and n is the number of monthly payments you’ll make over the mortgage term. 

Since this formula is rather complicated, it’s best to stick with online calculators!

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Estimating How Much 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 mortgage rate:

Down-Payment

Lenders look at a couple of things when approving your mortgage. First, they assess the down payment.

This is where you have the most freedom in the mortgage process, as you’re the one who decides how much you’re willing to pay as a down payment.

It’s only natural that the larger the down payment, the lower the mortgage, due to a decreased principal amount. Yet, the interest also decreases, as it relies on the principal.

Your Income

Next comes the risk part of the mortgage: Your income. Your disposable income determines your ability to pay the mortgage instalments.

Typically, lenders are more reluctant to approve your mortgage if you need more 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 by extending the mortgage term as well as the secondary expenses.

The Property

The decision of a lender doesn’t just depend on your financial position, but it also relies on the property. Lenders might deny your application if they deem the property to be too expensive.

Yet, if you have an exceptional financial record and are willing to put down a substantial deposit, you might get an approval.

That’s not all. 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.

 

Frequently Asked Questions

How can I lower my monthly mortgage payments?

It is possible to adjust a couple of aspects of your loan agreement to lower the monthly payments. These include:

  • Extending the mortgage term
  • Enhancing your credit score
  • Increasing your income-to-debt ratio
  • Refinancing at a lower interest rate

Should I get a fixed or variable-interest-rate mortgage?

Each mortgage type has its benefits and drawbacks. If you value certainty and like to be prepared in advance, then paying extra for a fixed-interest rate mortgage might be worth it.

In contrast, variable-interest mortgages can give you a financial advantage, as the interest might drop in the middle of your mortgage term. However, interest rates might also skyrocket.

When should I expect to pay off my mortgage?

Nowadays, you can get short-term mortgages for as short as two or five years. Yet, the monthly payments might be astronomical.

For this reason, more people than ever are opting for long-term mortgages, with the average borrower expecting to pay off their loan by 65 years old.

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Wrapping Up

Whether you’re getting a five-year or 30-year loan, mortgage payments are monthly. Naturally, experts suggest making payments that fit your monthly expenses and income so that you do not overextend yourself financially.

The rule of thumb is to put 36% of your salary towards debt settlement, with 28% going towards the home mortgage. More cautious individuals prefer to not overstep the 25% limit.

Alternatively, you might put 35% of your net salary towards your mortgage. This means a shorter mortgage term, thus paying less interest and less money overall. However, this would leave little room for savings and emergency funds.

If you are unsure of the percentage of your salary that you should put towards your mortgage repayments, When the Bank Says No can advise you. Our mortgage brokers will ensure that any mortgage arrangement we find for you provides you with the correct balance of value and affordability.  

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Emma Jones
Emma Jones
Emma began her career in Lloyds Banking Group, first in the unsecured & secured loans department at Halifax and later as a mortgage advisor at Lloyds. During 9 years in these roles and a further 2 years at Yorkshire Building Society, Emma was able to observe the impact of the recession, and how the banks let their customers down by denying loans and mortgages. Wanting to be a driving force for change, she stepped into a market advice role where she has been able to help clients when others couldn’t. Identifying a gap in the mortgage space, Emma went on to establish When the Bank Says No. As a keen property investor, she has been the focus of features in publications including The Sunday Times and This is Money. Emma’s greatest joy is overcoming the low expectations of their customers, many of whom have all but given up on getting a mortgage due. One thing Emma has learned through her own personal struggles is every client must be treated like a human and understood better by advisors and lenders in the industry. “We all have to navigate life events which can ultimately impact your financial status. It shouldn’t mean dreams of homeownership or business growth should have the breaks applied”. Emma and her team’s passion for helping people overcome the challenges they may face when applying for a mortgage have fuelled the success of When the Bank Says No.