Whether you are a first-time buyer or looking to move house, knowing how much you can borrow on a mortgage is important. Knowing the maximum amount you are likely to be able to secure from a lender is useful before you start house hunting and before you go through the process of applying for a mortgage.
In this article, we look at the criteria lenders use to decide how much they are willing to lend you, the differences between income multiples and affordability, as well as the steps you can take to maximise your mortgage borrowing.
How do mortgage lenders decide how much to lend?
In the past, lenders typically used a calculation based on the applicant's income to work out the maximum amount they were willing to lend. This was generally up to 5 times income for both single and joint applications. However, since changes were made to the rules governing mortgage lending in 2014, there is now a greater focus on affordability rather than simply what you earn. This extends to whether the mortgage will be affordable in the future, as well as at the time of application.
The applicant needs to demonstrate that they can afford to pay the mortgage, even if their financial situation changes or if interest rates rise significantly. To this end, lenders base their assessment on a scenario where interest rates rise by 3% more than the current rate. With the Bank of England base rate at 0.1% and mortgage rates starting at around 1% for a 2-year fixed rate, this would mean working out your repayment if mortgage rates were closer to 4%.
Change in monthly repayment if interest rates rose by 3%
|Mortgage amount||Monthly repayment based on 1.1% interest rate||Monthly repayment based on 4.1% interest rate|
*Based on a 25-year repayment mortgage
How do mortgage lenders assess affordability?
There are a number of factors taken into consideration when a lender decides how much you can afford to borrow. It isn't a simple calculation, but rather a more nuanced assessment, which includes looking at a number of factors including your income, your outgoings, your credit score and whether you are able to put down a deposit. We explain each of these in more detail below.
While it isn't the only thing taken into consideration, income plays a key part in the assessment. You will typically have to provide payslips and bank statements covering several months to prove your income. This will include your salary, as well as additional income from, for example, investments, benefits or regular work bonuses or commission.
If you earn a relatively high income - a household income of over £80,000 - you may be more likely to be accepted for a larger mortgage at a higher income multiple.
Lenders will look at existing financial commitments, including any loans or credit agreements, such as car finance or credit cards. They also look at the amount you spend on utilities and insurance products. In addition, they consider other living costs, including, for example, childcare, spending on clothes, eating out, gym membership and other recreational activities.
While the main focus is on essential living costs, discretionary spending is factored in. While you shouldn't need to dramatically change your lifestyle, if you are keen to maximise your borrowing, it may be wise to cut back on luxuries for a few months before you make your mortgage application, particularly if you're trying to get a loan at a high level relative to your income.
Your credit score with the main credit reference agencies is determined by your past financial behaviour. If you have missed payments, defaults or more serious misdemeanours on your record, such as a County Court Judgement (CCJ), you are less likely to be given a high income multiple on your mortgage as you will be deemed to pose more risk. For more information on getting a mortgage if you have poor credit, read our article "Can you get a mortgage with a very poor credit score?"
The amount of deposit you have will determine the loan-to-value (LTV) of the mortgage. If you have a lower LTV, a lender may look at your application more favourably and therefore consider lending at higher income multiples. Conversely, if you have a mortgage at a higher LTV, you may be considered a higher risk by the lender and it may limit the amount they are willing to lend you.
Can I borrow more with a joint mortgage?
When lenders previously based their calculations solely on income, they tended to apply a higher multiple to joint applications from two or more prospective borrowers. Now, however, the benefit of applying with a partner or friend is the fact you will be provided with a loan based on both of your salaries, rather than being offered a significantly higher multiple. For example, if you were offered 5 times your £25,000 annual income as a single applicant, you would be able to borrow up to £125,000. However, if you applied with someone also earning £25,000, you would collectively be able to borrow up to £250,000.
If you buy a property with someone earning substantially more or less than you do, it is worth asking your solicitor to draw up a contract stating what the expectation is on how the monthly repayments will be met and whether you will contribute equally or proportionately to the amount you own. This extends to how you would divide the equity in the property if it was sold in the future.
How many times my salary can I borrow?
As the amount you can borrow will vary from lender to lender, it is a good idea to consult a good, whole-of-market mortgage broker, such as online broker Habito* who will be able to advise you on how much you are likely to secure. They can also direct you to the lenders who are likely to secure you a more generous mortgage offer. As a guide, the table below shows the level of borrowing you can achieve at different income multiples.
Mortgage borrowing at different income multiples
|Salary||4 times||4.5 times||5 times||5.5 times|
What is a "professional" mortgage?
If you have a specific job, such as being a dentist, doctor or solicitor, where your salary is likely to increase significantly over time, you may be offered a “professional mortgage”. These allow you to borrow 5 to 5.5 times your income. This is because the lender has greater reassurance you will be able to meet the stress-testing and that your earnings will increase enough to deal with a rise in interest rates.
The professions permitted varies from lender to lender so, again, it is worth checking with a mortgage broker before completing your application to see if you will be eligible.
Which mortgage lenders offer high income multiples?
The lending criteria used by different mortgage providers change fairly frequently, but there has been a general trend to offering higher income multiples and higher LTV products. This is good news for those looking to get on the property ladder, although there tends to be stricter conditions applied to those deals. For example, they often require a higher-than-average income, only apply to people in certain professions or are only available to first-time buyers.
In the table below we highlight six of the most generous lenders in terms of the income multiples they are willing to lend at. It is vital, however, to check the small print on the products these lenders offer to see if you are likely to qualify, as well as how competitive they are in terms of interest rates and fees.
Mortgage lenders offering high income multiples
|Lender||Maximum income multiple||Eligibility|
|Darlington Building Society||6 times salary||Only available to certain professions|
|Santander for Intermediaries||5.5 times salary||Minimum £100k income and 25% deposit|
|Loughborough Building Society||5.5 times salary||Minimum £50k income|
|Clydesdale Bank||5.5 times salary||Only available to certain professions and minimum £40k income|
|Metro Bank||5.5 times salary||Available to certain professions or £100k single or £150k joint incomes|
|Nationwide||5.5 times salary||First-time buyers and only available on 5-10 year fixed-rate mortgages|
How much can I borrow if I'm self-employed?
Although most lenders that offer multiples of 5 times or more will exclude self-employed borrowers, the eligibility remains the same for both employed and self-employed applicants for more standard levels of borrowing. The same affordability assessments are applied and the applicant will have to demonstrate their income levels. This usually involves providing at least 3 years' of accounts, although some lenders will accept accounts for 2 years or less. Again it pays to consult a good mortgage broker to find the best option for your circumstances. You may also wish to check out our article "The 7 best questions to ask a mortgage broker"
If a link has an * beside it this means that it is an affiliated link. If you go via the link, Money to the Masses may receive a small fee which helps keep Money to the Masses free to use. The following link can be used if you do not wish to help Money to the Masses or take advantage of any exclusive offers - Habito
Looking for a financial adviser near you?
Do you need financial advice? An independent financial adviser can show you how to make the most
of your money. Find your nearest qualified and regulated adviser using this VouchedFor search tool.