For most people, a mortgage is the biggest financial commitment they will ever make.
Working out how much you can afford to borrow is an important first step towards taking out a mortgage and becoming a homeowner.
Mortgage lenders analyse your income, your expenditure, your deposit, your credit score and conduct a stress test on your finances before making a mortgage application decision.
Read our detailed guide to get all the details about how lenders work out what you can borrow.
What Lenders Look For
When it comes to how much you can afford to borrow for your mortgage, two opinions matter: yours and your lender’s.
By understanding what a lender is looking for when they decide how much you can borrow, it is possible to narrow down your property search to homes within your price range and prepare your finances for application.
The first thing a lender wants to hear about when they carry out an ‘affordability assessment’ is your income. Most lenders are able to offer from 3 – 4.5 times your annual salary, but the exact amount depends on a variety of factors.
If two people are applying, their salaries can be combined to secure a bigger mortgage. If more than two people want to make a joint application, a maximum of two salaries can be taken into account.
On rare occasions, it is possible to get a mortgage for up to 5 or 6 times your salary, but this is far more difficult than it used to be. In 2014, the UK’s Financial Conduct Authority conducted a review of the UK’s mortgage industry in a bid to eliminate risky lending.
Since then, lenders are only allowed to lend mortgages with a high loan-to-income ratio to 15% of borrowers. Some lenders steer clear of this borrowing altogether, as it can be considered risky.
However, if you have a very good credit score, professional qualifications and a high income, you may be able to find a lender who will consider giving you a mortgage worth up to 6 times your annual income.
Whatever your income is, you’ll need to provide evidence of it to your lender.
Acceptable proof of income includes:
- Bank statements
- Signed contracts detailing other sources of income (e.g. freelance work)
- Child maintenance agreements
- Two years’ business accounts, tax filings and bank statements for the self-employed
As well as considering your annual income, your lender will try to get a picture of your outgoings. This helps them assess how much ‘disposable’ income you have that isn’t already tied up with debt payments or other obligations.
You may be asked to fill out a form detailing your essential expenses, such as groceries or childcare costs, and expenses which you consider essential to your well being, such as holidays. These may be checked against bank statements you provide as part of your application.
Essential outgoings are then offset against your income to give a more accurate picture of how much income you have available to dedicate to mortgage payments.
Lenders may be more flexible in their assessment of outgoings which are easily reduced or cancelled (such as holidays) compared to non-negotiable expenses, such as childcare.
Your deposit may not directly affect how much a lender is willing to let you borrow, but it can influence which deal is available to you, which can affect how much you pay each month. Certain offers and mortgages are only available to people with loan-to-value ratios (LTV) below a certain level.
The LTV is a ratio which describes what percentage of the property is paid for outright by your deposit, versus the percentage you borrow.
For example, in a transaction when the buyer had a 25% deposit, the LTV ratio would be 75. The more deposit there is in relation to the property price, the lower the LTV ratio.
After deciding how much you can afford based on your current income, a lender applies a ‘stress test’. This is designed to see whether you would still be able to pay your mortgage if your financial circumstances took a turn for the worse.
The lender will increase the proposed interest rate by three percentage points and then reassess the mortgage’s affordability.
If the lender believes you would still be able to pay your mortgage after such a rise, you should be one step closer to mortgage approval.
Budgeting for Monthly Payments
Even though the new affordability rules make it harder to be granted an unaffordable mortgage, it can still happen. For this reason, it is important to carry out your own assessment against your budget.
Your budget may include expenses which a lender does not take into account when conducting their affordability assessment because they are considered ‘non-essential’.
If you accept a lender’s highest offer without conducting your assessment, you could find yourself having to cut back on expenses which are indeed ‘non-essential’ but greatly improve your quality of life (such as holidays or gym memberships).
The guideline that many experts propose is that your mortgage payment should not exceed 28% of your monthly income. Your total monthly expenditure on debt (including mortgage) should ideally be no higher than 36% of your monthly income- so if you have particularly high levels of debt from other sources, you may need to adjust your mortgage budget.
Based on this model, here’s how much you might be able to afford to borrow on a range of different salaries.
This does not take expenses or personal circumstances into account and should only be used as a guide:
|Salary (before tax)||Monthly Income (before tax)||Max. Mortgage payment (using 28% Rule)||Max. Mortgage (based no 4.5x salary)|
How Can The Mortgage Bank Help?
Here at The Mortgage Bank, we have partnered with some of the UK’s leading mortgage brokers.
They have already helped thousands of people get the best remortgage deal even people that have been refused before, and they can do the same for you.
Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.
If you would like to speak to one of these brokers who can provide you with a ‘whole market quote’ then click on the below and answer the very simple questions.