How much mortgage can I borrow? This is the golden question that we’re asked more than anything else! Well, you’re about to find out.
The amount you can borrow will typically depend on:
- Mortgage affordability (income and outgoings)
- The type of mortgage you’re applying for
- Employment status
- Credit history
- Your lender
There isn’t one answer for everybody and to make things even more confusing, the amount you can borrow will vary from lender to lender. Don’t worry, we’ll explain everything throughout this article.
Our advisors are also on hand to answer any questions and can calculate your exact mortgage affordability if needed.
How is mortgage affordability calculated?
It’s important to first understand how mortgage affordability works, as this is used to calculate the amount of mortgage you can borrow.
Mortgage affordability is based on your income and expenditure and more importantly the amount of disposable income you have each month. To calculate this, lenders will need to first establish what you earn. This is usually your annual salary amount.
Once lenders have established your income, they’ll then use a multiplier which can be anywhere from three to five times your annual income amount. This is also known as a loan-to-income ratio.
For instance, if you earn £60,000 a year, you may be able to borrow between £180,000 and £300,000, depending on the lender you’ve applied with.
Lenders will also calculate what your outgoings are. Outgoings would include day to day living expenses, along with any loans that you may have, including credit card debt.
Once your outgoings are deducted from your income, lenders are able to calculate how much disposable income you have each month. This then gives lenders a clear figure of how much you’re able to afford. This is how mortgage affordability is calculated.
Due to changes made by the FCA, lenders also need to carry out stress-tests. This is to check whether a mortgage would be affordable even if circumstances changed. For instance, if you were made redundant or interest rates increased, would you still be able to afford a mortgage?
Lenders each have their own stress-tests, however having savings can help in showing that you’re financially secure.
What can be used as income for mortgage affordability?
You’ll have to provide evidence in the form of bank statements and payslips to document your income. Lenders will usually request at least three months of documents but may request more.
Most lenders will consider the following as income for when assessing your affordability:
- Annual salary (guaranteed income)
- Bonuses and overtime (subject to your lender)
- Income from investments (such as buy to let)
- Child maintenance (from council or ex-partner)
If you’re self-employed, then lenders will usually request your SA302 tax returns and filed accounts if you have them. You may be asked for three years’ worth of accounts history but certain lenders may approve a mortgage with one year’s accounts.
What’s classed as an outgoing?
Your outgoings are essentially your spending habits. If you earn £30k a year but spend £30k a year, how can you afford a mortgage? This is why it’s important for lenders to establish the amount of disposable income you have.
Lenders will calculate your outgoings by assessing the following:
- Outstanding loan payments
- Credit card debt
- Livings costs (utilities, insurances)
- Finance agreements (such as vehicle finance)
- Child maintenance payments
Lenders may also look at other spending habits such as gambling. You’ll have to provide bank statements and credit card statements to support your application.
What impact does credit history have on affordability?
Having a great credit score can certainly give lenders confidence in your application. A strong credit file shows that you’re reliable with credit and haven’t had any past issues. As a result, lenders may offer you the maximum amount you can borrow.
On the other hand, if you have bad credit then you may struggle to borrow the maximum amount. Lenders can insist on you using a larger deposit and that’s only if they’re prepared to approve you a mortgage in the first place.
It’s a good idea to check your credit file before applying with a lender. You can also speak to our specialist advisors to check what your options are. If you’re not in a rush, you can take steps to improve your credit score before applying.
Borrowing for a buy to let mortgage
Borrowing for a buy to let is slightly different from the residential market. There are some buy to let lenders that won’t require you to have an income at all! This is because buy to let lenders are more interested in the income from your investment.
Most lenders will assess buy to let affordability on a loan-to-income ratio of 125%. This means that the income from your buy to let will need to cover at least 125% of the mortgage repayments. Even if you have a large personal income, the numbers for your buy to let also need to stack up.
Using a mortgage calculator
You can use our mortgage calculator to work out how much a mortgage will cost each month and whether it would be affordable.
It’s important to note that online mortgage calculators won’t ever be as accurate as actually getting a personal quote. You can use mortgage calculators to check how much you can borrow, but they’re only approximate figures.
Calculators are built on pre-determined values and won’t factor in your entire profile. Furthermore, each lender has their own online calculator which will give you different amounts that you can borrow. This is simply because lenders all have their own affordability criteria.
Using a broker to calculate how much you can borrow
Unlike mortgage calculators, advisors will take your entire financial situation into account and can provide you with specific costs and quotes from lenders.
This is why using an advisor can be so beneficial. In all honesty, it’s the only way of calculating the amount you can borrow accurately. Not only will an advisor check how much you can borrow, but they’ll also find the best possible deal too.
Mortgage calculators are good for giving approximate values; however, you should always contact a professional for an actual mortgage quote. Our advisors have a wealth of experience in mortgages and can provide you with the exact amount that you’ll be able to borrow.
You can make an enquiry below or call us on 0800 195 0490 to get started.