A guide to how much you can borrow for a mortgage
We see that there is a popularity with the use of mortgage calculators offered by brokers via their websites, however we have experienced that these calculators do not reflect how affordability is calculated by lenders. It is important to note that calculating how much to lend a person can differ from lender to lender. Here is a general guide on how much a person can borrow for a mortgage -
Find out what you can borrow
How much you can borrow for a mortgage in the UK is generally between 3 and 4.5 times your income. Or 4 times your joint income, if you're applying for a mortgage with someone else (although some lenders may let you borrow more).
If you’re looking to estimate how much you can borrow in the UK, here are some steps you can take:
Use a mortgage borrowing calculator (available on the lenders website)
Since the 2008 financial crash, mortgage lenders are far stricter regarding who they will lend to. Lenders will now conduct affordability checks on you before loaning any money to ensure you can meet the monthly repayments.
Check your credit score
Affordability is based on an in-depth study of your income, your outgoings and your total debt. They will also scrutinise your credit file.
Lenders also want to be sure you could afford the repayments, even if the interest rates were to increase by 4% above the Bank of England base rate. This is known as stress testing.
Additionally, you may only be able to borrow the maximum amount if you already have a current account with the lender, or a very large deposit.
Get an agreement in principle
To get a more accurate maximum mortgage figure, you can apply for an decision in principle (DIP). While an DIP is not the same as a formal mortgage offer, it is a theoretical figure of what a lender may be willing to lend you.
Most estate agents will not take an offer seriously without an AIP. You can secure one quickly online or via a mortgage broker.
How much mortgage can I afford?
How much mortgage you can borrow and how much mortgage you can afford are slightly different. While a lender may be prepared to let you borrow a lot, you may prefer a smaller mortgage so that you can still afford to do other things. Before you borrow the maximum amount, you should think about whether you could comfortably afford the monthly repayments on a large mortgage.
A general rule of thumb is that you don't want to spend more than 30% of your take home salary on mortgage repayments.
Any more than that and you risk being "house poor" - where you own a house, but lack the money to do other important things (like build up your savings, go on holiday, hobbies etc.)
In London, where house prices are very high, it can be hard to keep your repayments under 30% of your income.
Before getting a mortgage, it is vital to work out what the total cost of home ownership would be for you. If your mortgage payments and household bills look like they will take up 40 or 50% of your income, you should consider getting a smaller mortgage.
How much deposit do I need to get a mortgage?
In most cases, you will need a minimum of a 10% deposit to secure a mortgage, meaning you’ll need a 90% mortgage loan.
The size of the loan versus the property value is referred to as the loan-to-value ratio, or LTV. A 90% loan is often called a 90% LTV mortgage.
If you are able to save more, however, and can offer a 15 or 20% deposit, you’ll increase your chances of being accepted for cheaper mortgage products.Not only will you need to borrow less, you will be charged a lower interest rate on the money you borrow. It’s a win-win.
The cheapest mortgages are generally only available if you have a big deposit, or – if you’re remortgaging or moving house – a large amount of equity in your property.
How do lenders assess my affordability?
When deciding how much of a mortgage to offer, lenders will spend some time assessing your financial situation, looking at how long you’ve been in a job, lived at your current address and had a bank account.
Essentially, they want to be sure of your ability to make the monthly mortgage repayments and will therefore look at how reliably you have paid back any borrowings in the past – which will involve reviewing your credit file in depth.
Most Agreement in Principle (AIP) only require a soft search on your credit file, which means other lenders will not see this search on your file.
A real mortgage application, however, will leave a mark on your credit file that all other lenders will be able to see.
Each lender has its own scoring system (it does not see the score you do, that’s just for you). In general, having more marks can count against you because it could suggest you are desperate for credit. Being turned down for a loan product will also have a negative impact on your credit file.
It is therefore important to apply to each of the 3 main credit agencies: Experian, Equifax and TransUnion for your credit file before submitting any mortgage applications. This will enable you to check the information held and correct any errors.
Try to avoid applying for anything that will require a credit search (such as credit cards or even insurance policies) while applying for a mortgage, as it can make you look desperate for credit.
It is also worth spending some time making sure your address is correct on all active accounts and ensure you are listed on the electoral roll. In short, do everything you can to show what a reliable and conscientious borrower you would be.
How much mortgage can I get with bad credit?
If you have bad credit you may still be able to get a mortgage, it will just be harder to find a lender willing to give you a loan.
You will likely need a larger deposit if you have a history of bad credit, and the best mortgage rates won't be available to you.
Generally the best way to find a bad credit mortgage is to talk to a mortgage broker
How do lenders calculate what mortgage I can afford?
There are a number of factors that lenders will take into account, including:
Income vs. outgoings
On application, mortgage lenders will look at your salary, guaranteed bonuses, pension, investments and any other income you have.
You’ll need to prove your income with payslips and bank statements.
If you are self-employed, there are some additional hoops to jump through (see below for more details). Lenders will also closely examine your outgoings.
This doesn’t just include your rent (or current mortgage repayments if you’re remortgaging), which is likely your biggest monthly expense. They will also look closely at other regular bills (credit cards, mobile phone, bills, utilities) as well as your living expenses.
If you are down to £0 the day before pay day, or worse still, you’re in your overdraft, and your bank statements show you eat at restaurants four times a week, you could find it very hard to get a mortgage as it will look like you cannot manage your money.
For that reason, it’s important to get your finances in order at least 6 months before you apply for a mortgage.
You might feel pleased to know you could afford the monthly payments if you secure a mortgage with a low interest rate. But what would happen if rates increased to 4% above the lender’s standard variable rate (SVR)?
According to Moneyfacts the average SVR today is 4.67% – so your finances would be tested on an interest rate of around 8.67%. This is known as stress testing.
Stress testing can also help take into account possible changes to your lifestyle such as redundancy, having a baby, or taking a career break.
If the lender doesn’t feel you could afford your mortgage payments in these circumstances they may limit how much you can borrow.
Rainy day fund
On this note, preparing for a rainy day should be high on the list for anyone intending to take out a mortgage, as you never know what is around the corner.
Having enough savings to cover three months of mortgage payments stashed away may even help you sleep better at night!
Should I borrow the maximum amount?
It can be tempting to borrow your maximum mortgage amount and buy the most expensive property you can afford – but that may not be the right thing to do. High monthly payments could leave you little wiggle room should interest rates go up, or your income go down…or both!
This could also leave you “house poor” – where you own a house, but you have no funds left to pay for everyday things without going into debt.
Borrowing less money could mean you buy a smaller house, but give you a better quality of life as your finances are not over-stretched.
What’s more, you may just find your deposit goes further. If you have £20,000 as a deposit, that’s only 5% of a £400,000 property, but 10% of a cheaper £200,000 property. Instead of being restricted to 95% LTV mortgages, you can check out those 90% LTV deals that have invariably cheaper rates.
The other thing to remember is that mortgage products are usually arranged in a tiered fashion, with a lower interest rate offered every time your LTV goes down by 5%.
If you’re looking at buying a property and your LTV would be 87%, you might consider raising a slightly larger deposit to push yourself into the (cheaper) 85% LTV threshold.
How can I drop my LTV band if I’m remortgaging?
If you’re remortgaging your home, the exact same rule of thumb applies – you want to aim for the lowest LTV possible – but instead of raising a big deposit you get to use the equity in your home. For example: Say you raised a deposit of £40,000 and borrowed £360,000 to buy a home valued at £400,000 (an LTV of 90%). Now the five-year fixed-rate deal has ended, you want to remortgage to a new fixed-rate mortgage.
You’ve since paid off £40,000 from the principal debt – so you owe the lender £320,000 – and your home has gone up in value to £420,000.
Assuming you want to get a new mortgage for the same amount – £320,000, with £100,000 in equity – you would have an LTV of just 76%.
However, a 76% LTV mortgage will most likely have the same rates as an 80% LTV mortgage.
To drop to a 75% LTV (and therefore lower the interest rates) you would need to add £5,000. Alternatively, you could try and get a slightly higher valuation for your home, which would help you drop to a 75% LTV. If you’re remortgaging to unlock money for home improvements or other expenses, remember to keep your LTV tier in mind.
If you can stay within a lower LTV tier, perhaps by borrowing slightly less, you’ll save a lot more in interest repayments in the long-term.
How much mortgage can I get if I’m self-employed?
You can still get a mortgage if you are self-employed - you’ll just have a few more hoops to jump through than if you were a full-time employee.
Use a mortgage payment calculator
Before you apply for a mortgage and risk a failed application on your credit report, use our mortgage payment calculator to check that you can meet the affordability tests that lenders will run when you apply for a mortgage formally.
Use a mortgage broker
If you’re self-employed, speaking to a mortgage broker is vital. They will know which lenders are most likely to accept you, and therefore reduce the chance of a credit-score damaging rejection.
Ensure you have business accounts and tax returns
Lenders will consider you more of a risk, so you will need to gather together at least two complete tax-years of business accounts and tax returns. Some lenders require that the documentation has been signed by a chartered accountant to prove that the information you’ve provided is reliable. Your maximum mortgage will then be based on your net profit, not total turnover.
The exact calculation will vary from lender to lender and also on your legal status – self-employed is different from the sole director of a limited company, for example.
Some lenders may base your maximum mortgage on your past trading history, while others might want projections of future customers and income. Prepare both, just in case..