Mortgages & Affordability 101

What is a Mortgage & How is Affordability Tested?

A mortgage is a loan for a house. You borrow money from a lender, pay it back with interest over 15–40 years, and the property is security against the loan. If you stop paying, the lender can take the house.

But lenders don't just check if you can pay the monthly payment. They run three separate affordability tests:

• Test #1: Can you afford the monthly payment? (Loan-to-Income, or LTI)
• Test #2: Is your deposit big enough? (Loan-to-Value, or LTV)
• Test #3: Can you still afford it if rates rise? (Stress testing)

All three must pass. A "yes" on one test and "no" on another = rejected.

Affordability Test #1: LTI (Loan-to-Income)

Example: You earn £50,000/year. A lender limits LTI to 4.5×. So maximum loan = £50,000 × 4.5 = £225,000.

Why? Regulators require this stress test. It's not because you necessarily can't afford more—it's because borrowing beyond 4.5× salary becomes riskier if rates spike or your income drops.

The math: This calculator tests LTI by showing you the total loan. If your loan is larger than 4.5× your salary, many lenders will reject you.

Affordability Test #2: LTV (Loan-to-Value)

Why deposit size matters:

• 10% deposit (90% LTV): Higher interest rates, stricter lender criteria, mortgage insurance required
• 15% deposit (85% LTV): Better rates, wider lender choice
• 20% deposit (80% LTV): Best rates, lender competition, easier approval

Lenders use LTV as a safety buffer. The bigger your deposit, the more "skin in the game" you have, and the lower their risk if property values drop.

Affordability Test #3: Stress Testing (Rate Rise)

Lenders test: "If interest rates rise by 2%, can you still afford this mortgage?"

This is why lenders are cautious. Rates don't stay fixed forever (unless you lock in a 5-year fixed). A variable-rate mortgage can get expensive if the Bank of England raises rates.

Your Three Affordability Levers

You can't change your salary easily, but you can control three things:

Fixed vs. Variable Rates: Why It Matters for Affordability

Fixed rate (e.g., 2-year or 5-year fixed):

• Your payment stays the same for the fixed term
• Safer for affordability planning (you know exactly what to budget)
• Typically costs slightly more than variable rates

Variable rate (tracked to Bank of England base rate):

• Your payment changes monthly or quarterly as rates move
• Risky if rates rise (your payment could jump £100+ per month)
• Slightly cheaper than fixed rates when rates are low

For affordability: If your budget is tight, fixed rates are safer. Variable rates are only affordable if you have a buffer for rate rises.

Affordability Checklist