Most people need a mortgage when the time arrives to buy a house.
You often won’t be able to afford it without one.
So, you must budget well to know the property value you should look for.
Keep reading to learn how much you can afford to borrow for a mortgage.
How much can I borrow?
Most lenders will lend you a figure that’s 4 or 4.5 times your salary.
So, if your yearly salary is £25,000, banks like Barclays will offer around £112,500.
This can vary based on different circumstances. If you’ve got a bad credit score or are in unstable employment, the bank may not let you borrow as much.
You should only agree to a mortgage if you can repay it without financial difficulties.
What impacts how much I can borrow for a mortgage?
Several factors go into the calculation of how much you can borrow. You can see the main ones below.
Annual Salaries
Your annual salary is the starting point for most mortgage calculations.
As mentioned above, lenders use a multiple of your yearly gross income. This allows them to decide how much they’re willing to lend.
But this multiplier can vary based on the lender’s policies and your financial situation.
Do you have another guaranteed income?
If you have extra guaranteed income sources, lenders can also consider these.
This income can increase the amount you can borrow, showing a higher earning capacity.
Credit score & history
Your credit score and history are vital in calculating how much you can borrow. A high credit score suggests to lenders that you’re a low-risk borrower.
This can lead to more favourable loan terms and higher borrowing limits.
However, a poor credit history might limit how much you can borrow and result in higher interest rates.
Your outgoings
To work out your disposable income, lenders will assess your regular outgoings. This includes:
- Loans
- Credit card debts
- Other recurring expenses.
High outgoings reduce the amount you can repay each month. This will impact the total loan amount you can secure.
The size of your deposit
Your deposit amount will also affect how much you can borrow. A larger deposit reduces the amount you need to borrow.
It demonstrates your saving capabilities to lenders. This leads to more favourable loan terms.
Employment status
Your employment status and job stability are very important factors.
Those in permanent, stable employment are often viewed as lower-risk borrowers.
Self-employed individuals, for instance, may face more scrutiny. You’ll need extra documentation to prove their income stability.
Other debts
Existing debts, such as personal loans or credit card balances, will be considered in the mortgage application process.
High debt levels can limit your mortgage options. This is because lenders may be concerned about you managing extra repayments.
How big of a deposit do you need to get a mortgage?
The mortgage deposit you put down on a house affects your ability to get a mortgage. It also influences the terms of the mortgage itself.
The size of your deposit is proportional to the mortgage amount you need.
A larger deposit generally means borrowing less, leading to lower monthly repayments.
How much are deposits?
Most lenders want a minimum deposit, often around 5 – 20% of the property’s value.
Large deposits
A large deposit can positively impact the terms of your mortgage. Lenders view a larger deposit as a sign of financial stability, reducing their risk.
This can result in more favourable terms, such as lower interest rates.
Small deposits
A smaller deposit often means a higher loan-to-value ratio. It leads to higher interest rates to offset the lender’s increased risk.
So, while a larger deposit requires upfront savings, it can offer long-term financial benefits.
How much can you borrow if you’re self-employed?
Securing a mortgage can be more difficult for self-employed individuals.
Lenders often view self-employed borrowers as having a higher risk due to fluctuating incomes.
However, on paper, self-employed individuals are still eligible for the same multiplier of 4-4.5 annual earnings.
In practice, though, it can vary.
What should self-employed people do?
Proof dating back at least two years
The key for self-employed borrowers is to prove income stability and reliability.
Lenders typically ask for at least two years of business accounts or tax returns to verify income.
Type of proof
This documentation should show consistent or increasing income.
This reassures lenders of your ability to make regular mortgage payments.
Lenders assess a self-employed individual’s income differently.
They may consider your net profit, not just your gross income.
Ltd. companies
For limited companies, lenders might look at salary and dividends. They may also consider retained profits in the business.
Credit score
A strong credit score is also vital for all borrowers, but even more so for the self-employed.
It’s one of the few ways a lender can gauge financial responsibility. So, maintaining a healthy credit history and a good credit score is crucial.
Large deposit
Another way self-employed individuals can counteract the increased risk is to put forward a larger deposit.
This will offer more security to the lender. But prepare for more detailed scrutiny of your finances.
Other documentation
Lenders might ask for extra documentation. Examples include a profit and loss statement or proof of upcoming contracts.
How can I get a larger mortgage?
If you’re looking for ways to maximise your borrowing potential for a mortgage, several strategies can help you achieve this goal.
Here are some things to think about:
Increasing your income
Increasing your income is one straightforward way to increase how much you can borrow.
This could involve seeking higher-paying job opportunities. It might also be working towards a promotion or exploring extra income streams.
As lenders look at your income to determine your loan size, a higher income can translate into a larger mortgage.
Reducing debts
Lenders consider your debt-to-income ratio when determining your mortgage size. Paying off debts like credit cards can improve this ratio.
A lower debt level means more of your income is available for mortgage repayments. It can signify your ability to pay back more each month.
Improving your credit score
A higher credit score can make it easier to get a mortgage and affect how much you can borrow.
Lenders view a high credit score as an indicator of financial responsibility and lower risk.
Ensure you’re on top of your credit by paying bills on time, keeping credit card balances low, and checking your credit report for errors.
Offering a larger deposit
The larger your deposit, the less you need to borrow. Saving for a bigger deposit can be challenging, but it will allow you to borrow more.
A larger deposit also lowers the loan-to-value ratio, which can result in more favourable mortgage terms and interest rates.
Choosing the right lender
Each lender has different criteria and risk appetites. Shop around and speak to various lenders, including traditional banks and credit unions.
This helps you find one willing to offer a larger mortgage.
Consider using a mortgage broker who can help navigate this process and find the best deal for your circumstances.
Joint mortgages
If you’re buying with someone else, such as a partner, your combined income can increase the amount you can borrow.
Joint mortgages are another way to access more significant loan amounts.
But everyone must be on the same page about responsibility for repayments.
Interest rates
The interest rate on your mortgage affects your monthly repayments. A higher interest rate means higher monthly payments and vice versa.
When planning how much you can afford to borrow, remember to factor in interest rates and how they may affect the cost of your mortgage.
Fixed vs. Variable rates
Mortgages come with either fixed or variable interest rates.
Fixed-rate mortgages lock in your interest rate for a certain period. This offers stability and predictability in your payments.
Variable rates fluctuate based on market conditions. This means your payments can go up or down over time.
How interest rates affect how much you can borrow
Lenders often calculate your borrowing capacity based on the assumption that interest rates will rise.
This ensures that you can still afford the mortgage if rates increase.
So, current low rates might mean you can borrow less as lenders factor in the possibility of rate hikes.
