The rules for determining how much a mortgage company would allow you to borrow used to be relatively simple. A bank or building society would typically give you three times your salary if you were single, or two and a half times a couple’s combined salary. That was all well and good when house prices were relatively low. Unfortunately, prices have rocketed in recent years. Whilst in 1986 the average mortgage was only £25,000, twenty years later it was £115,000. Today, the average UK house costs £180,000, whereas the average salary is around £25,000. Needless to say, the three-times rule went out of the window a while ago.

All of this means that mortgage lenders have had to change their approach. Instead of sticking to their single, simple rule, the criteria are now more complex. Aside from salary, they take into account other factors such the size of deposit you can manage, and perhaps what your regular outgoings are.

Obviously, a person with a salary of £25,000, no existing debts and modest monthly outgoings is going to be a better prospect than someone who earns £30,000 but has an extravagant lifestyle to pay for, as well as their mortgage. The type of mortgage you go for – fixed rate, tracker or offset – will also make a difference.

How mortgage calculators work
There are a range of mortgage calculators available on the web, but most are very similar and easy to use. You simply type the requested information such as salary and deposit into the online form and the program returns the maximum amount of money a mortgage lender is likely to loan you.

Alternatively, a variation is to key in the size of the loan you think you will need, the interest rate you think you will pay and the term of the loan, and the calculator returns your estimated monthly payments. This second option leaves it to you to decide whether you could afford to make those payments or not (some calculators deduct your other regular outgoings for you). Whether or not a mortgage lender will agree with you is another matter. In fact, in both cases the calculators are meant as guidelines rather than guarantees. There will be various other factors you will need to bear in mind, such as any fees and the precise type of mortgage, when you actually approach a broker or lender. Nevertheless, the mortgage calculator provides a valuable indication of what you can realistically afford to borrow.

A word of warning
One final point to bear in mind is that a mortgage calculator that gives you a ballpark figure for your monthly repayments requires you to enter the expected rate of interest. Whilst this is currently historically quite low, you should take into account the effect that a sharp rise might have. For example, borrow £100,000 at 4% over 25 years and your monthly payments will be around £530. But if rates hit 12% (or higher), as they did in the late 1980s and early 1990s, your payments could rocket to twice as much.