Most people need a mortgage 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 4 or 4.5x your salary.
So, if your yearly salary is £25,000, banks like Barclays will offer around £112,500.
What impacts how much I can borrow for a mortgage?
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.
An important note is to check your credit score and history before making a mortgage application.
This ensures that everything is recorded accurately and nothing may affect your application.
Your outgoings
To work out your disposable income, lenders will assess your regular outgoings.
This includes loans, credit card debts, and 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.
Most lenders want a minimum deposit, often around 5 – 20% of the property’s value.
An even larger deposit reduces the amount you need to borrow. It demonstrates your saving capabilities to lenders, leading to more favourable loan terms.
Employment status
Your employment status and job stability are very important factors.
Those in permanent employment are often viewed as lower-risk borrowers.
Self-employed individuals may face more scrutiny. You’ll need extra documentation to prove their income stability.
Lenders typically ask for at least two years of business accounts or tax returns to verify income. They may consider your net profit, not just your gross income.
For limited companies, lenders might look at salary and dividends. They may also consider retained profits in the business.
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 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:
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.
So, current low rates might mean you can borrow less as lenders factor in the possibility of rate hikes.
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. So, your payments can increase or decrease over time.
