If you're in the market for a new home and want to know how much you could borrow for a mortgage, a mortgage broker can help. A broker will consider the mortgage amount and your deposit to determine the maximum property price you can afford.
To work out how much you can borrow, the mortgage broker will conduct an affordability check by reviewing your income and outgoings. The more money you spend each month, the less you might be able to borrow. By working with a mortgage broker, you can better understand how much you can afford and which lenders may be able to offer you a mortgage.
When assessing your affordability for a mortgage, lenders will take into account several criteria, including your:
- Employment status
- Total gross income
- Regular outgoings
- Student loan repayments
- Childcare costs
- Credit history
In the past, lenders would also calculate your ability to afford the mortgage if interest rates were to climb to 3%.
Change in mortgage affordability tests
In 2014, the Bank of England implemented two mortgage rules to prevent household debt and issues like repossessions from triggering the economy. These restrictions were implemented to protect lenders' financial stability by ensuring that borrowers do not take on more debt than they can afford to repay.
The two rules were a loan-to-income limit and an affordability test that included a "stress interest rate" for lenders to consider when assessing a borrower's ability to repay a mortgage over time. To determine a borrower's ability to repay, most lenders used their standard variable rate plus three percentage points for stress-testing applicants' finances. This meant that if you couldn't afford to repay your loan at 3%, your application would be rejected, even if you were paying rent much higher than that.
This barrier was removed in August 2022. However, the loan-to-income limit will remain in place. To navigate these changes and ensure that you can secure the right mortgage for your financial situation, working with a mortgage advisor who can guide you through the process may be helpful.
Does this make it easier to get a mortgage?
The Bank of England has acknowledged that rising interest rates and an increasing number of lenders factoring the cost of living crisis into mortgage applications were affecting the affordability of mortgages. The Bank of England's stress test assesses whether a mortgage buyer could still afford their mortgage if the mortgage rate were three percentage points higher than the reversion rate at any point over the first five years of the loan. However, this extra 3% was making it difficult for some people to get the loan they needed to get on the property ladder. The Bank's figures suggest that the affordability test is forcing around 30,000 buyers each year to take out a smaller mortgage than they require***. Simplifying the process means borrowers such as first-time buyers who can pay high rents but cannot pass the lender's stress test will have a better chance of getting on the property ladder. The new measures may also make it easier for self-employed individuals and freelancers to obtain a mortgage. However, the extent to which lenders will pass these changes on to borrowers is uncertain, and some lenders may still use their form of testing based on their risk appetite.
How much can I borrow?
When it comes to borrowing for a mortgage, lenders typically use an income multiple of 4-4.5 times the salary per person. For instance, earning £30,000 a year, you may be able to borrow anywhere between £120,000 and £135,000. However, some lenders may offer a mortgage that is 5 times your salary, which means if you earn £40,000, you may be able to borrow up to £200,000. Nationwide Building Society recently announced* that it would lend up to 5.5 times income to first-time buyers with a 5% deposit. Other lenders will lend up to 5.5 times income to applicants with a salary of at least £75,000 a year.
Determining the exact amount you can borrow becomes more challenging if you receive bonuses, commissions, or overtime as part of your income. The decision on whether additional earnings will be counted toward your borrowing capacity depends on individual lenders. For instance, NatWest** takes the average of the past two years of a guaranteed bonus, and if your bonus is discretionary, they will only include 50% of that when adding it to your regular income.
I'm self-employed, how much can I borrow?
As a self-employed individual, you will need to provide proof of your earnings for each tax year. This information is typically found on the annual tax returns filed with HM Revenue & Customs. The SA302 form on the government's self-assessment portal summarises your earnings and tax year overview for the past four years.
To qualify for a mortgage, you must typically provide at least two years of tax returns. However, a limited number of lenders may accept one year. If you work as a contractor, you may need to provide recent payslips and a copy of your employment contract. As long as you pass the affordability checks, you should be eligible for the same mortgage deals as those who are employed. You may be able to borrow up to 4.5 or even 5.5 times your annual income, depending on the lender and their criteria.
Does the size of my deposit make a difference?
The size of your deposit is crucial when getting a mortgage, and a mortgage broker can help you find the best deal based on your deposit amount. The larger the deposit, the cheaper your mortgage is likely to be, as the size of your loan will be smaller, and you will have access to the best interest rates. Lenders are more likely to view you as less risky if you put a significant sum of money into the property.
A mortgage broker can help you find the most suitable lenders based on your deposit size and financial situation. They have access to a wide range of mortgage products and lenders and can help you compare each option's interest rates and terms. For example, if you have a deposit of just 5%, a mortgage broker can help you find lenders that offer the best interest rates for borrowers with a low deposit.
Generally, the cheapest mortgage deals are usually available to people with a deposit of at least 40%. However, a mortgage broker can help you find lenders that offer competitive rates for borrowers with smaller deposits, so you can still get a good deal on your mortgage.
Can I borrow more on a joint mortgage?
When you apply for a joint mortgage with another person, such as a spouse, partner, family member or friend, you may be able to borrow more than if you were applying for a mortgage on your own. This is because lenders will consider both applicants' combined income, meaning you may have access to a larger pool of funds.
For example, if one person earns £30,000 and the other earns £25,000, the joint income would be £55,000. Based on the lender's income multiple of 4-4.5 times the total annual income, you could borrow £220,000-£247,500. It's worth noting that most lenders will only accept joint applications from two borrowers, but some may consider a joint application from up to four people. When applying for a joint mortgage, it's important to consider each applicant's credit history, financial situation and ability to repay monthly.
Does having bad credit impact the amount I can borrow for a mortgage?
When you apply for a mortgage, lenders will check your credit report to assess your past loan management and evaluate whether you will likely be a responsible borrower. You'll likely have a good credit score if you have consistently made loan repayments on time. However, you may have a poor credit score if you've struggled with loans. This could influence the amount a lender is willing to lend you, resulting in a higher interest rate. Additionally, fewer lenders may be willing to work with you due to your credit history.
This aside, it is still possible to get a mortgage with bad credit and it helps to show yourself in the best light possible, a bad credit mortgage broker can help with this.
Should I max out on my mortgage?
Consulting with a mortgage advisor may help you make a more informed decision about whether you should max out on your mortgage. Your mortgage advisor can evaluate your financial situation and provide expert advice on the best options. Factors such as job security, monthly expenses, and future plans will be taken into consideration to ensure you make a sound financial decision. Remember, it's important to borrow an amount you feel comfortable repaying each month to avoid financial hardship.
- *Source: Nationwide
- **Source: Natwest
- ***Source: The Independent
