If you’re in the market to purchase a property, the mortgage stage is one of the most critical parts of the process. At this point, you can work out which properties you’ll be able to purchase successfully. Understandably, many buyers ask, “How much can I afford to borrow for a mortgage?”
The mortgage application stage can be the most stressful part, so understanding the process in detail can offer guidance when required later. That’s precisely what we’ll be aiming to do in this article. We’ll cover everything from how much you can borrow to how to calculate it and other vital parts of the process.
So, let’s get started with the most critical question.
How much can I borrow?
The answer to this question will ultimately depend on your financial situation. When applying for a mortgage, the lender will consider several factors (which we’ll explain next) that provide the total figure.
However, as a general figure, lenders will provide a figure that is 4 or 4.5 times the annual salary per applicant. So, as an example, if your yearly salary is £25,000, banks like Barclays will offer £112,500 that you can borrow.
Now, a lender may offer to provide a certain amount of money, but you should only agree to it if you can comfortably pay it back without facing financial difficulties at a later stage.
What impacts how much I can borrow for a mortgage?
Several factors go into the calculation of how much you can borrow. Let’s take a look below:
Your annual salary is the starting point for most mortgage calculations. As mentioned above, lenders use a multiple of your yearly gross income to estimate how much they’re willing to lend. However, this multiplier can vary based on the lender’s policies and your financial situation.
Do you have another guaranteed income?
If you have additional guaranteed income sources, such as rental income, dividends, or perhaps part-time job earnings, these can also be considered by lenders. This extra income can increase the amount you can borrow, as it shows a higher overall earning capacity.
Credit score & history
Your credit score and history are vital in calculating how much you can comfortably borrow. A high credit score suggests to lenders that you’re a low-risk borrower, which can lead to more favourable loan terms and higher borrowing limits. On the other hand, a poor credit history might limit how much you can borrow and result in higher interest rates. An important note is to check your credit score and history before making a mortgage application. This is to ensure that everything is recorded accurately and nothing may affect your application.
To work out your disposable income, lenders will assess your regular outgoings, including loans, credit card debts, and other recurring expenses. High outgoings reduce the amount you can comfortably 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 and demonstrates your saving capabilities to lenders, potentially leading to more favourable loan terms.
Your employment status and job stability are very important factors that are also required. Those in permanent, stable employment are often viewed as lower-risk borrowers than those in temporary or unstable work situations. Self-employed individuals, for instance, may face more scrutiny and require additional documentation to prove their income stability.
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, as lenders may be concerned about your ability to manage additional repayments.
How big of a deposit do you need to get a mortgage?
The deposit you put down on a house not only affects your ability to get a mortgage but also influences the terms of the mortgage itself, including the interest rate. Here are some points that you should think about:
The size of your deposit is directly proportional to the mortgage amount you need. A larger deposit generally means borrowing less, leading to lower monthly repayments. Most lenders require a minimum deposit, often around 5-20% of the property’s value. However, 20% of the total mortgage amount is the most popular requirement with high-street lenders.
A substantial 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.
Conversely, a smaller deposit often means a higher Loan-to-value ratio (the mortgage amount compared with the property’s value), leading 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, including lower interest rates.
How much can you borrow if you’re self-employed?
Securing a mortgage can be more difficult for self-employed individuals as it comes with additional challenges. Lenders often view self-employed borrowers as 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, however, it can vary.
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. This documentation should show consistent or increasing income, which 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. For those operating as limited companies, lenders might look at salary and dividends or consider retained profits in the business.
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. Therefore, maintaining a healthy credit history and a good credit score is crucial.
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. However, be prepared for a more detailed scrutiny of your finances. Lenders might ask for additional documentation, such as a profit and loss statement or proof of upcoming contracts for those who rely on contract work.
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, working towards a promotion, or exploring additional income streams such as part-time work or rental income. As lenders look at your income to determine your loan size, a higher income can directly translate into a larger mortgage.
Lenders consider your debt-to-income ratio when determining your mortgage size. Paying off debts, primarily high-interest debts like credit cards can improve this ratio. A lower debt level means more of your income is available for mortgage repayments and can signify your ability to pay back more each month comfortably.
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
Different lenders have different criteria and risk appetites. Shop around and speak to various lenders, including traditional banks, credit unions, and online lenders, to 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.
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 regarding responsibility and accountability for repayments.
The interest rate on your mortgage directly 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, offering stability and predictability in your payments.
Variable rates, on the other hand, fluctuate based on market conditions, meaning 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 in the future. This ensures that you can still afford the mortgage if rates increase.
Therefore, current low rates might mean you can borrow less as lenders factor in the possibility of rate hikes.
What is a mortgage calculator?
There are numerous mortgage calculators available online, each with different features. However, the primary basis behind them is that they will estimate how much you could borrow. They typically ask for details on the following:
- Number of applicants
- Regular spending (Debts and liabilities, e.g. credit card payments)
- Reason for the mortgage
- Deposit amount
Once you provide those details, you’ll be given a figure on how much you can realistically borrow. You will also be given the loan-to-value ratio.
In conclusion, you should be able to borrow a mortgage amount of 4 to 4.5 times your annual salary. Other factors like your deposit size, current debts and credit history also play an essential part in determining whether or not you’ll be able to borrow the total estimated amount.
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