How much can I afford to borrow?
Why salary & deposit affects how big a mortgage you can get
Income and the size of your deposit – or the amount of equity you've already got – both have a fundamental impact on how much money a mortgage lender might allow you to borrow. Lenders also 'stress test' you to see if you'd be able to keep up with repayments if interest rates suddenly shot up, all of which means you should be realistic about how much money you hope to borrow. This guide talks you through it all.
Looking for more mortgage help?
We've got lots of other helpful guides and tools:
- First-Time Buyers' Guide. Free PDF to get you on that first rung.
- Remortgage Guide. Free PDF which has loads of remortgaging tips.
- Cheap mortgage finding. How to find the top deal for you.
- Mortgage Best Buys. Find your top mortgage deals.
- Help to Buy Equity Loan & Shared Ownership. Two options if you're struggling to get onto the property market.
Lenders check how much you can afford
Lenders used to just multiply your income by up to five times to work out your maximum mortgage size. Now it's a lot more complicated as the lender has to check the affordability of the mortgage – but in basic terms, this just means whether you can afford the repayments.
But, again, it's still not quite that simple. These days lenders must obey strict guidelines to check whether a borrower can afford their mortgage repayments, not just at current interest rates, but also if interest rates shot up to 6-7%.
PLUS... with the global economy having been turned on its head because of coronavirus, lenders want more proof than ever of your income and creditworthiness.
Mortgage 'evaluations' have got harder. Some lenders conduct actual interviews with you, while others carry out their assessments behind the scenes based on information you provide. Either way, be prepared for the lender to do a THOROUGH assessment.
Typically lenders will will want to know about income and big bills such as utilities and debt, but in years we've also heard stories about more gruelling interrogations where people are asked how often they eat steak. This may be an extreme example, but lenders will likely check these outgoings:
- Gym membership
- Car costs
- Eating out
- Weekly shop
- School fees
Ignore the scaremongering. It's not 'they'll tell you to stop eating steak'. They're judging affordability, so if eating out costs push you over the edge it can be a problem. If you can comfortably afford it, it's not.
Even so, it's best to make it as easy for your lender as you can. Take a look at our Boost Your Mortgage Chances guide for tips on how to do this.
Most look at your spending in the three months before you apply for a mortgage, so if you know you're about to apply, try to live sensibly, and well within your means for several months before. Put up as much as you can for the deposit if it's your first mortgage, as borrowing less means less risk for the lender, and hopefully less close scrutiny for your finances.
If you get bonuses or irregular income, unless the amount is guaranteed, lenders may only count half of this towards your annual salary when determining how much you can borrow. This varies between lenders though, so it's best to check with the lender.
If you're self-employed or would struggle to prove your long-term income – perhaps you've worked abroad or you are on a temporary contract – then getting a mortgage is tough.
It's also really hard if your business has been impacted by the pandemic and you received one of the self-employed income support grants whilst they were still available. While coronavirus support doesn't automatically exclude you from getting a mortgage, it might indicate to the lender that your business isn't sustainable in the long term.
Either way, you'll need cast-iron proof of your income. Be prepared to provide up-to-date evidence to show how your business is faring. You'll also need to show:
- Business accounts. You need to show preferably three years of accounts – though two can suffice depending on the lender – usually signed off by a chartered accountant.
- Tax returns. If you can't show business accounts then two or three years' tax returns are the next best option.
You'll be assessed on net profits, not turnover. If this is likely to be complex, using a mortgage broker could help as they'll know which lenders require what evidence. Remember that many lenders won't accept past coronavirus grant support as part of your turnover/net profits.
While this can work for those in established businesses, to be realistic, it could mean those who have recently started working for themselves may not be able to get a mortgage. If you're self-employed and your partner isn't, your mortgage may be calculated using their income only.
Note that self-cert mortgages – mortgages where you declare your own income and the lender doesn't require proof, common in the mid-noughties – are no longer available.
Can I get an accurate maximum loan figure?
You won't get a fully accurate figure until you apply for a mortgage, but if you speak to a lender or a mortgage broker, they should be able to give you an estimate. In the meantime:
- Use our calculator to estimate how much mortgage lenders might offer you. The How Much Can I Borrow calculator is a rough estimate based only on your income, so any significant outgoings, such as child maintenance, debt repayments or school fees, could reduce the amount a lender's prepared to offer you.
- Have a search on our Mortgage Best Buys tool. From there, you'll be able to benchmark a top mortgage deal, and then either find a broker or a lender who'll be able to help you with an estimate of how much you could borrow.
You can then try getting an agreement in principle (AIP). An AIP is a mini-application to the lender where it asks for some personal details and carries out a credit check to see if it would be willing to lend to you, subject to further checks. It'll also tell you how much it'll lend you.
If you're approved for the AIP, the battle's half over. It means the lender's looked at you, credit checked you, and on the surface, you're someone that it would lend to. But it is only half the battle, because it's not binding on the lender, or on you.
An AIP only means that the mortgage lender's taken a cursory glance over your finances and your credit record and not seen anything that would mean it would turn you down.
When it comes to the time to turn an AIP into a full application, the checks a lender undertakes become so much more detailed. It asks for proof of income, it asks for your monthly outgoings and it does a full credit check.
If the lender finds something in this that it doesn't like, it won't lend to you.
The AIP might also not be converted into a mortgage offer because the lender doesn't want to lend on the property you're buying. Some won't lend on flats above shops, or properties constructed with unusual material.
If you're buying, you should find out how much you can borrow before you start house hunting, but be clear on how much you can afford.
If you're remortgaging, work out how much you need before finding out what a lender might be prepared to offer. It's easy to get tempted to up the loan size when the lender is willing, but don't exceed what you think is affordable.
Use the Budget Planner spreadsheet to work out what you can afford to repay. If it shows you can't afford a property, don't ignore it. Only look at properties within your budget and avoid those even a fraction over. If not, you'll either break your resolve or be disappointed.
You'll boost your mortgage chances if you've got at least a 10% deposit
Once you know how much you might be able to borrow, you need to work out what you're able to provide as a deposit (or equity if you're remortgaging).
In recent years the minimum deposit a first-time buyer has required is 5%. However, the arrival of coronavirus saw the number of 95% mortgages decline dramatically (though they've been making a comeback – thanks partly to the Government launching its 95% mortgage guarantee scheme). This means you'll have a better chance of getting a mortgage if you've got a 10% deposit. Either way, you'll need to give cast-iron proof that you can afford to pay back a mortgage.
As mentioned, the bigger the deposit/equity, the better the mortgage rates will be and the better your chances of being accepted by a lender, as you'll be seen as less of a risk. If you are on the borderline of affordability, having more to put down might help the lender to say yes. In short...
- 10% is often the minimum deposit needed since coronavirus
- 20% to 25% gets you a decent rate
- 40% gets you the top rates
So as a rule of thumb, the more you can save up, the better...
"The bigger your deposit, the cheaper the mortgage deal"
On the best-buy tables and comparison sites, you'll see that lenders talk about the loan-to-value (LTV) ratio. This is the percentage of the property value you're loaned as a mortgage – in other words, the proportion you're borrowing.
To calculate this, simply subtract your deposit/equity as a percentage of the property value from 100%. So if you've a £20,000 deposit on a £100,000 home, that's a 20% deposit. This means you owe 80% – so the LTV is 80%.
Similarly, if you're remortgaging, and you own 20% of the value of your home, you'll need a remortgage deal for the remaining 80% – this is your LTV. Here's an easy table:
The reason it's expressed this way is so the same terms can be used for those getting a first mortgage and those who want to remortgage.
It's worth thinking about LTVs for a moment. They're not just affected by the amount you put into a house, but also by house prices. This is crucial – by owning a house, you've invested in an asset where the price moves.
A practical example:
Let's say when you first bought, you had a £10,000 deposit on a £100,000 house – that meant you owed £90,000 at the start. That's an LTV of 90%. After a few years you've paid a little off and now owe £85,000. You're ready to remortgage and the house's value is the same, so your LTV has become 85%.
Yet if the house is now also worth more, say £120,000, then your LTV is around 70% (as it's £85,000 divided by £120,000 multiplied by 100). This means you'll be likely to get a much better remortgage deal. Equally, if the house's value had dropped to £80,000, you'd now owe more than it's worth (negative equity) and you'd be unable to remortgage.
Pumping savings into your mortgage can get you a better rate
Mortgage and remortgage rates are priced in the LTV bands – and the bigger deposit/equity you have, the lower the interest rate will be.
Typically mortgages get much cheaper at 90%, 80%, 75% and 60% LTV, as this table demonstrates:
|Total payments over two years||£28,522||£23,978||£21,212||£16,854|
|The table is for a house value of £300,000 on a two-year remortgage fix, capital repayment basis over a 25-year term, including fees. Updated August 2021|
The relationship breaks down below 60% LTV. Someone borrowing 45% of the value of their property will typically pay the same rates as someone borrowing 60%. But if you borrow 61%, you won't be able to get those rates.
If you currently have slightly less than needed to reach one of those LTV boundaries, it's worth scraping together the extra, or – if buying – trying to haggle on the property's purchase price with the seller.
If you're at the top limit of a boundary (eg, 75% LTV), finding a little bit extra for the deposit to push you another 0.1% down (eg, to 74.9%) could improve your chances of acceptance. It could also reduce the amount of paperwork the lender wants to see.
There are two ways to drop an LTV band
The first way to drop an LTV band is very simple.
1. Pump more money in so you can borrow less
Work out how much additional money you would need to put in to drop to a lower interest rate band and see how much interest you'd be saving.
One way you could do this is to overpay your mortgage, where you also get the advantage of paying interest on a smaller amount of debt. And if your LTV falls, it means when it comes to remortgaging, you may be able to get a cheaper deal than if you hadn't overpaid your mortgage.
2. Double check if your property is now valued higher than when you first took out a mortgage
When you apply for a mortgage, you need to give an estimate of the property's current value. You want to get the top value possible, but it needs to be realistic as the lender will get an independent valuer to check it later in the process. However, if you haven't remortgaged for a while and house prices have increased it could mean that you're now in a lower LTV band as a result (although if house prices have dropped it could have the opposite effect).
Valuers don't just pluck a figure out of the air, and neither should you. Use our Free House Price Valuations guide to look at houses similar to yours that have sold recently, or maybe even ask a friendly estate agent for their opinion.
It's all about risk for the lender. If you're only borrowing 60% of the property's value, then the lender will be pretty assured of getting its cash back if it had to repossess your property and sell it.
But if you're borrowing 95% of the property's value, the lender is facing more risk. It would only need the property to drop by 5% before it'd likely be facing a loss. It can't be assured of making all its money back. This is why the rates for 95% mortgages will be much higher than rates for 60% mortgages – you're paying a premium for risk.
Looking for more mortgage help?
We've got lots of other helpful guides:
I've only got a small deposit – what help is there?
If you want to your first home but you're stuck with a low deposit then it's a tough market out there at the moment. Don't despair though if you've only got a 5% deposit and you're struggling to find a mortgage, there are options available.
Which one is right for you will depend on your situation and whether you're looking to buy now or in the future – and remember it's always best to talk your situation through with a broker.
- Boost your deposit with a Lifetime ISA. Anybody between 18 and 39 can open a Lifetime ISA, where you can save up to £4,000 a year, with the state adding a bonus of up to £1,000 a year too.
- Use a Help to Buy Equity Loan to access cheaper mortgages. First-time buyers in England can bolster their deposit by borrowing up to 20% of a property's value by taking out a Help to Buy Equity Loan, interest-free for the first five years.
- Check out the Government's 95% mortgage guarantee scheme. The Government is trying to lure lenders into offering more 95% mortgages by shouldering some of the 'risk'. See which lenders have signed up in our 5% Deposit Mortgages guide.
- Explore shared ownership. Here you buy a share of a property – typically between 25% and 75% – and pay rent on rent on the share you don't own. You'll also have the option to purchase the remaining share. See our Shared Ownership guide.
Clever ways to calculate your finances