Wondering how much you’ll be able to borrow on a mortgage? Whether it’s, how much you can borrow as a first-time buyer, how much you can borrow if your self employed or how much you can borrow on a joint mortgage.
Take the guesswork out of it and understand the many factors that are used to calculate and work out how much you can borrow, whether you’re a first-time buyer, single, self-employed or buying through help to buy schemes.
In this article, we’ll take a look at how you can work out what you can borrow on a mortgage. You can also use our mortgage calculator to give you an estimate.
How much can I borrow on a mortgage?
There are several factors to consider when you’re looking at how much you can borrow on a mortgage. Since the financial crisis of 2008 regulators have introduced tougher and tighter measures into mortgage lending.
Now it means if you are looking at taking a mortgage you’ll need to consider the following factors that will impact how much you could borrow:
- You’re likely to be capped at how much you will be able to lend, usually up to 4.5 times your income.
- Your income type will be assessed. This is because not all lenders are the same and may not take a view of your entire income especially if you earn overtime or are self-employed.
- Your credit file will be scrutinised including any adverse credit history.
- Your deposit amount
- Your affordability
Not every lender is the same, you’ll find that each one not only has their own set of criteria that you’ll need to meet but they also have different ways of assessing how much you can borrow.
How will my mortgage be calculated?
To start, having an idea of how much deposit you have for a mortgage will help in deciding how much you have to budget for.
The minimum a lender will require is 5%, so for example if your potential purchase is £200,000 you’d need at least a £10,000 deposit for a mortgage.
Before the banking crisis in 2008 lenders will have talked in terms of loan to income ratios or income multiples, they would tell you what you could borrow on income alone.
Since then we know that there are other factors that can affect what you can borrow. However, lenders will still cap loaning amounts as multiples of your income for ease. You’ll generally see income multiples being capped at anything between 4x – 5x your income.
Therefore, if you earn £20,000 and your lender caps at 4x your income the potential maximum you’d be able to borrow is £80,000 – but this is before they’ve calculated in your affordability.
It’s worth bearing in mind that lenders have now set caps as to how much they loan and restrict thresholds to a £500,000 limit.
Not only is the amount you earn taken into account, but lenders when working out how much you can borrow will want to know how you earn your income.
Not every lender will take into account everything that you earn, i.e. overtime, bonuses, commission and even benefits. They may not consider additional benefits aside from your fixed salary or they may take into consideration 50% of your commission or bonuses. It all depends on the lender.
We know at the Online Mortgage Guru, depending on your job your income may not be straightforward. Whether you’re self-employed, a locum doctor or on a fixed-term contract, your income may be a little more complicated. Seeking expert mortgage advice via an advisor who has experience in your area can help you understand how much you’ll be able to borrow.
Credit history plays a major part in a lender’s assessment, it not only affects how much you can borrow but also affects whether a lender will even consider your application.
Having adverse-credit or a low credit score can impact whether a lender (particularly mainstream lenders) will consider you at all.
Depending on how severe the credit issue is and how recent it is, or even whether you have multiple adverse issues, will affect your borrowing power. Again, every lender is different and where one may not accept a particular credit issue there will be another one that will.
Following the banking crisis lenders started lenders have become stricter in terms of what they deem affordable.
You can expect lenders to conduct a review of what your monthly expenditures are in order to calculate how much your disposable income is. They’ll then use this to inform their decisions on the maximum loan payments you could afford.
Do my circumstances affect how much I can borrow?
Lenders will change the way they assess an application depending on what you are applying for and where you are in the market.
The amount you can borrow can change depending on whether you’re:
- A first-time buyer
- Already a homeowner and are looking to re-mortgage or move
- An investor purchasing a buy to let
- A developer
What can I do to ensure I get the maximum amount of mortgage I need?
Although you should exercise caution when thinking about how much you can afford now and in the future, there are steps you can take to ensure you’re offered the most from your income.
- Improve your credit score – can you repay old debts or close old accounts, correct any errors on your report or register of the electoral roll to help improve your score?
- Increase your deposit – although you can get a mortgage with a 5% deposit the lower your loan to value rate is. Having a bigger deposit reduces the risk to lenders and opens up further more favourable options that work in your favour.
- Pay off debts – Not only will it increase your credit score but it will increase your disposable income.
Speaking with an experienced broker whatever your circumstances, who has access and knowledge of whole of market lenders and their criteria means you can get an idea of how much you can borrow before you apply. They can put you in front of the right lender based on your individual circumstances from the start.