What you need to know
If you are planning to buy a home, you may have already obtained an Agreement in Principle (AIP) from a lender. This gives you an idea of how much money you can borrow, but it is important to remember that this amount can change if interest rates increase.
How is affordability determined?
Mortgage affordability is determined by several factors, including your income, your expenses, and the interest rate on your mortgage. When interest rates increase, your monthly mortgage payments will also increase. This can make it more difficult to afford a home, especially if you have a high debt-to-income ratio.
There are two main calculations that lenders use to determine your mortgage affordability: the loan-to-income ratio (LTI) and the net monthly income. The LTI is the percentage of your monthly income that will go towards your mortgage payments. The net monthly income is the amount of money you have left after you have paid your monthly expenses.
Lenders typically have a maximum LTI that they will allow. For example, a lender may only be willing to lend you up to 4.5 times your annual income. This means that if you earn £100,000 per year, the most you could borrow would be £450,000
In addition to the LTI, lenders will also look at your net monthly income. This is the amount of money you have left after you have paid your monthly expenses. Lenders will typically want to see that you have enough money left over to cover your living expenses, such as food, transportation, and utilities.
If interest rates increase, your monthly mortgage payments will also increase. This can make it more difficult to afford a home, especially if you have a high debt-to-income ratio or a low net monthly income.
If you are concerned about how rising interest rates will affect your mortgage affordability, you should speak to a mortgage advisor. A mortgage advisor can help you to understand your options and find a mortgage that fits your budget.
What you should do
Rising interest rates can make it more difficult to afford a home. However, there are steps you can take to protect yourself from the impact of rising interest rates. By speaking to a mortgage advisor, you can get the information you need to make an informed decision about your home purchase.