If you are looking to buy a property that requires a mortgage of £500,000 or more, there are a number of factors to consider when assessing how likely you are to be accepted for the loan. Top of this list will be whether you can afford a mortgage of this size and whether you are likely to pass the strict affordability assessments that are now part of the mortgage application process.
In this article we explore everything that's involved in getting a £500,000 mortgage - including how much it is likely to cost - and explain how to find the best deal for you.
How much do you need to earn to get a £500k mortgage?
Since the Mortgage Market Review in 2014, lenders no longer just look at your income when assessing the maximum amount they are willing to lend you. However, while your outgoings and existing financial commitments will be scrutinised, income is still a key component. Overall, lenders want to know not just what you can pay, but how much you can realistically afford to pay, both now and if your circumstances changed in the future.
Although it depends on the lending criteria of the individual mortgage lender, the income multiple tends to be 4 to 4.5 times your earnings, either as a sole applicant or taking into consideration both incomes in the case of joint mortgages. This means to secure a £500,000 mortgage, you would need an income of between £111,111 and £125,000, singularly for a sole mortgage or collectively for a joint mortgage.
However, some lenders are willing to lend at higher income multiples, with some going as high as 5 or 6 times. Indeed, with a handful of lenders, if you earn a relatively high wage - generally over £45,000 per year for a single applicant - you are more likely to be offered a higher income multiple. Some lenders also offer so-called "professional" mortgages, where they will lend at higher multiples to those in certain careers, such as doctors or lawyers. Also, the type of interest rate you choose may affect the salary multiple offered as part of your mortgage deal.
Largely, buy-to-let mortgage amounts are deciphered using the potential rent that can be charged for the property rather than what you earn.
Income multiples for a 500k mortgage
In the table below, we highlight how much income you will need - either as a sole applicant or combined with another applicant - to secure a mortgage of £500,000 at different income multiples
|3.5 times income||4 times income||4.5 times income||5 times income||5.5 times income||6 times income|
For more information on how much you are likely to be able to borrow on your mortgage, read our article "How much can I borrow on my mortgage?"
What deposit do you need to get a £500k mortgage?
The mortgage guarantee scheme, which was introduced by the government in April to incentivise lenders to return to offering 95% loan-to-value (LTV) mortgages, is available on properties up to a value of £600,000, so it is possible to get a £500k mortgage with just 5% deposit, either from one of the lenders participating in the scheme or from one of the many others who have now returned to the 95% LTV space.
However, it is worth keeping in mind that 95% LTV mortgages are more expensive and the assessment process is likely to be slightly more stringent than for lower LTV deals as you will represent a greater risk to lenders. If you can afford to contribute more to your deposit, you will likely get a more competitive deal.
500k mortgage - Deposit and loan to value comparison
In the table below, we show you the amount of deposit you will need to qualify for mortgages at different LTVs on a £500,000 loan.
|Mortgage loan-to-value||Deposit amount needed for £500k mortgage|
For the best and cheapest 95% LTV deals, read our article "Which are the best 95% LTV mortgages - and should I get one?". For an explanation of the mortgage guarantee scheme, read "Mortgage Guarantee Scheme - how it works and what it means for you".
How much will a £500k mortgage cost?
A £500,000 mortgage is a sizeable debt to take on and working out what the monthly repayment is going to be, both during the initial offer period and over the long term, is vital in helping you assess whether it is going to be affordable for you. The cost of your repayments will be determined by two factors:
As discussed above, the rate you are likely to secure will be based on the LTV of the mortgage, as well as your credit history and the specific lending criteria of the individual lender. You need to consider not only the rate during the introductory period, but also what it reverts to when that offer period comes to an end unless you choose to remortgage at that point. Although interest rates have been at historic lows for well over a decade, we are now experiencing a rapidly changing mortgage market and interest rates are relatively high. If you haven't already experienced a hike in interest rates, you should factor in what you will have to pay if rates go up significantly in the future. Indeed, lenders apply a stress test during their affordability assessments to see if the borrower could manage the repayments if rates were 3% higher.
Quite simply, the longer the mortgage term, the lower the monthly repayment. However, bear in mind that every additional year on your mortgage term will add significantly to the total amount you have to repay because of the extra interest payments you will have to make. While it used to be standard to have a 25-year mortgage term, it is now possible to extend that up to 30 or even 40 years. Generally, though, it is better to reduce your mortgage term by as much as possible, without making the monthly repayments unmanageable.
£500k mortgage cost comparison
In the table below, we show your estimated monthly repayment on a £500,000 repayment mortgage, taken out over different mortgage terms, not including fees.
£500k mortgage repayment comparison
In this table, we show the total you will repay - including interest payments - on a £500,000 mortgage over different mortgage terms. It assumes a fixed rate of 2.5% for the life of the mortgage.
|Mortgage term||Monthly repayment||Total repaid over full term||Total interest paid|
The figures clearly show the high price you pay to secure a lower monthly payment. For example, taking out a £500,000 mortgage over 25 years at 2.5% will mean you pay £407 per month less compared with taking out the same deal over 20 years. However, instead of paying £135,949 in interest if you took out the shorter term, you would pay £173,01 by opting to spread it over 25 years. That is a difference of £37,061.
There is advice on how to reduce your mortgage term and save money in our article "How to pay off your mortgage faster - and is it a good idea?"
How to get accepted for a £500k mortgage
Before you start the mortgage application process, it's a good idea to work out exactly what your income is and whether you are likely to be able to afford a mortgage of £500,000. Here are three things you can do to improve your chances:
Get your finances in order
Lenders will normally take into consideration the following sources of income:
- Your salary: This is more straightforward if you earn a regular amount paid monthly. It can be more difficult to prove if you are self-employed, earn a proportion of your salary as commission or bonuses or work irregular hours.
- Overtime/bonuses: Lenders vary in how willing they are to consider income from working extra hours or being paid an annual bonus. Generally, they will require evidence from your employer that this income is guaranteed to continue.
- Dividends/ interest from investments: Lenders may want to see that the dividend is paid regularly, providing proof that it is stable income. Lenders may require a letter from your accountant to confirm the dividend arrangement.
- Government benefits: Lenders are happy to consider government benefits when assessing a mortgage application and will look at the amount received as well as the regularity of the payments.
Pay off existing debt and reduce your spending
Lenders will be looking at your existing financial commitments so by paying off outstanding loans or finance arrangements, you can improve your chances of being accepted for a mortgage. However, you need to make sure you can afford to repay the debt; you don't want to sacrifice savings you have set aside for a deposit to clear debt as this could also reduce your chances of being accepted for the loan.
You may want to explore the prospect of an interest only mortgage to reduce your monthly payments and create other means and plans to repay your mortgage at the end of the term. Discussing options for repaying your mortgage in a different way could mean that an interest only mortgage is a better plan for how you will repay your mortgage but has to be planned carefully.
Similarly, lenders will typically look at bank statements for the previous two or three months, so if you can trim any unnecessary spending over that period, it can work in your favour in terms of how you are viewed by the lender. You don't need to go to extremes, but perhaps consider putting off buying big-ticket items or taking out gym membership until after your mortgage has been approved.
Improve your credit score
A major factor in whether you are likely to be accepted for a mortgage is your credit history. The lender will assess your credit file with one or more of the main credit reference agencies, TransUnion, Experian or Equifax. If you have missed payments, defaults or more serious misdemeanours, such as CCJs or bankruptcy, in the past 6 years, it will impact your credit score and make it less likely you will be given the loan. There are, however, specialist lenders who serve borrowers with impaired or bad credit, which are best accessed through a good, independent mortgage broker.
While there is little you can do about existing black marks on your credit file, everyone can benefit from checking their credit reports and making sure the information on them is correct. You can also help improve your credit score by taking simple steps, such as making sure you have registered to vote. For more ideas on how to improve your credit score, read "How to improve your credit score quickly".
It's also possible to improve your credit score with Experian by using its Experian Boost service. It works by assessing your spending habits, including regularly paying for things like subscriptions to Netflix or Amazon Prime, as well as regular savings, to immediately "boost" your credit score, for free. For a review of this service, read "Experian Boost review - can it really help improve your credit score?"
Use a good, whole-of-market mortgage broker
The best way to ensure you secure the best deal available and get accepted for a loan of any size is to use an independent mortgage broker. They will give you access to exclusive deals that can only be accessed by intermediaries. You can also use their extensive knowledge of the mortgage market to help find the lender who is most likely to accept your application.
Having met the team and seen the service they offer, we like online mortgage broker Habito*. They cover a wide range of lenders and products and have a great customer service track record.
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