How much can I borrow for a mortgage?
Getting the right mortgage deal and the amount that you want to borrow on your mortgage can be difficult, especially if you’re stretching your budget.
There are lots of different elements that are considered by mortgage lenders to provide a loan or deal. Lenders will provide an ‘income multiple’ as a guide to how much you can borrow when buying a home, but there are several other elements to be factored in.
There are many reasons why you might need to know how much you can borrow on your mortgage, such as:
- Buying a property (purchase prices)
- Debt consolidation (how many debts can you clear)
- Purchasing an item (e.g. car, motorbike, caravan etc.)
- Lend money to children or dependents
- Deposit for another property (e.g. holiday home, buy-to-let etc.)
In this guide, we’ll explain how mortgage income multiples work and look at what mortgage lenders use for affordability calculations.
What are income multiples?
A common term that is used in the mortgage world is ‘income multiples’. This basically refers to a calculation of a multiplication of salary or income.
Mortgage lenders use these calculations as the main part of their formulas to assess affordability for any mortgage. Each lender has its own income multiples which range from 4 times to 6 times your salary usually.
You can use an income multiple to identify which mortgage lenders might be best for you. This will help you estimate how much you can borrow for your mortgage. There are a number of other elements that will be factored in to their calculations for this as well.
Here are some examples of income multiples for single and joint mortgages.
Single mortgage income multiples
|4 times salary
|4.5 times salary
|5 times salary
|5.5 times salary
|6 times salary
Joint mortgage income multiples
|4 times salary
|4.5 times salary
|5 times salary
|5.5 times salary
|6 times salary
How do mortgage lenders calculate affordability?
When you apply for a new mortgage or a remortgage, it is highly likely that you’ll hear the word ‘affordability’.
The mortgage regulator (Financial Conduct Authority) gives lenders very strict guidance around mortgage affordability criteria. This is to make sure that people don’t borrow more money than they can afford to repay over the term of the mortgage.
Mortgage lenders have their own affordability criteria which is unique to them to be able to calculate your maximum loan amount before they give you a mortgage offer. This is a formula that is applied to your mortgage application based on several key elements.
TOP 5 ELEMENTS TO MORTGAGE AFFORDABILITY
1.INCOME (e.g. Salary, dividends, rental income etc.) is one of the most important and first elements that is used to calculate your affordability for a mortgage loan. Your income will provide lenders and mortgage underwriters with the amount that you receive in your bank each month. Each borrower will have different types and levels of income, which can be made up of several different common elements.
As we’ve explained above, mortgage lenders will apply an income multiple formula to calculate your affordability.
2. EXPENDITURE (e.g. bills, childcare costs, regular payments etc.) will also be taken in to consideration as a key element to assess your affordability for a mortgage loan. Most lenders will also request copies of your recent bank statements to provide evidence of your regular outgoings.
Lenders will usually apply a multiple of the balance for credit cards and store cards. This is because some people will clear the balance monthly, while others will make minimum or set payments.
3. CREDIT COMMITMENTS (e.g. loans, credit cards, store cards etc.) is another key element as most of us will have other credit commitments. Your monthly repayments will be deducted from your income which will then provide lenders with a more accurate assessment of affordability.
If you’re consolidating debts then these repayments may be deducted from your future affordability with some mortgage lenders, but not with all.
4. CREDIT SCORE can also be used to calculate your affordability to indicate your ability to repay any financial commitments. Lenders will also look at the risks of lending money to a customer and therefore will review their credit history. If you have mild, moderate or severe credit problems then this can have an impact on your ability to borrow.
5. DEPOSIT OR EQUITY (Loan to Value or LTV) is the final major element of the affordability calculation for mortgages. Loan to Value (LTV) is the amount of money that your property is worth, less the amount of deposit or equity that you have.
How much can I borrow for mortgages for self-employed?
If you’re self-employed, you can still use the same formulas to calculate how much you can borrow for your new mortgage or remortgage.
There are several different types and levels of self-employment which range from small sole traders to directors, limited company owners or CEOs of big businesses. Essentially, if you own a percentage of a business then you might be classed as being self-employed for mortgages.
Some of the most common elements that will apply to self-employed people that don’t apply to employees are:
- Salary for Directors or company owners (usually smaller than paid employees)
- Dividends (performance based income for owners or directors from business profit)
- Business accounts (2 or 3 years accounts required for most mortgage lenders)
- SA302’s (tax returns used to provide evidence of income)
If you’re not sure how much you could borrow, you can get advice from an independent mortgage expert. This can be helpful for people with more complex income and working histories.
You could also use a mortgage calculator to work out an estimate of how much you can borrow. Some brokers and building societies even have a specific self employed mortgage calculator available to use.
Note: it is generally easier to get a self-employed mortgage if you’re able to provide two or three years accounts. Some lenders will offer a mortgage with only one years accounts but interest rates are usually higher.
Do loans and credit cards affect how much I can borrow on my mortgage?
The simple answer is yes. Any other credit commitments such as loans, credit cards or store cards will be taken in to account when assessing mortgage affordability.
There are two main elements to consider here which are:
- Ongoing credit commitments (not being ‘satisfied’ i.e. still to be repaid)
- Debt consolidation (credit commitments to be repaid) *remortgages only
If you have any outstanding credit when you apply for a mortgage, then it will be factored in to your affordability. This might also be the case, even if you are planning to consolidate or repay this credit commitment.
- Loans or regular payments will usually be deducted from your monthly income where you have 6 months or more remaining on the repayment term.
- Credit cards and store cards will usually be calculated at between 3% and 5% of the outstanding card balance for your monthly repayments.
Lenders will look at your debt to income ratio, the type of debt and more before making any decisions about your mortgage.
How much can I borrow on mortgages for joint applicants?
It is extremely common for you to apply for a mortgage in joint names, such as married couples.
When you apply for a joint mortgage, there are some slight differences to calculating how much you can borrow on your mortgage. Most lenders will simply take both individuals combined and apply all calculations to joint incomes and expenditure.
Your income would usually be combined with your partners or joint applicants income which would give you a higher joint income figure. Your combined income figure would then be applied to the income multiple in the same way as a single income.
Also, both outgoings and expenditure would be combined to then calculate how much you can borrow on a mortgage for joint applicants.
Which mortgage lenders offer higher income multiples?
It can be difficult to say which mortgage lenders offer higher income multiples because these change regularly. Mortgage lenders regularly review and update its income multiples, depending on its current risk strategy.
There are some mortgage lenders that have typically been leaders in offering higher income multiples. These can also be deceiving because there are so many other elements and factors that are taken in to consideration.
Also, you are more likely to be able to get a higher income multiple for your mortgage for any of the following categories.
- High earners (e.g. over £50k per annum)
- Professionals (e.g. doctors, pilots, accountants etc.)
- Low Loan-to-Value loans
- First time buyers
Some of the main mortgage lenders that might offer higher income multiples include.
- Nationwide: 6.5 times salary
- Clydesdale Bank: 5.5 times salary
- Loughborough BS: 5.5 times salary
- Metro Bank: 5.5 times salary
- Santander: 5.5 times salary
How much can I borrow mortgages with bad credit?
Having bad credit or a low credit score is common and especially in the current economy where cost of living is so high. The amount of people applying for mortgages with credit card debts for example, will be far higher than ever before.
People are often caught in a vicious circle where they might have difficulties in being able to afford their outgoings. Alternatively, you might just have made a mistake and missed a payment. There’s a vast range of levels and severity of bad credit, ranging from minor missed payments to bankruptcy or fraudulent behaviour.
The impact on your ability to borrow on your mortgage will be based on how severe your bad credit was and how recent it is.
Mortgage lenders will almost always use your credit report and credit score to assess the levels of risk for lending to you. The most common credit reference agencies are Experian or Equifax and you can obtain a copy prior to applying for a mortgage.
If you think that you have a low credit score due to bad credit, then it’s usually worth getting a copy of your credit report. You can then question any bad credit that you don’t feel is accurate, and you can discuss this with your mortgage advisor or lender.
How much can I borrow mortgages for buy-to-let properties?
Another different type of residential mortgage that is often applied for is buy-to-let or investment properties.
A buy-to-let mortgage is completely different to a standard residential (first home) mortgage, because it is funded by rental income. Your goal for any buy-to-let property or portfolio is to own a property that provides you with an income, depending on your mortgage repayments.
Mortgage lenders will assess how much you can borrow for a buy-to-let mortgage based on the ‘typical rental income’. Lenders will use average rental incomes for similar properties in the local area from websites such as Zoopla or Rightmove.
Most lenders will allow you to borrow an amount where the ‘interest-only’ repayments are 25-30% lower than the rental income.
Rental income – £500/month
Maximum mortgage repayment: £400/month
Things to avoid when thinking about how much can I borrow mortgage
Hopefully, by now you’ve got a good idea of how much you can borrow on your mortgage and you can roughly calculate your lending capacity.
There are a few points that you also might want to think about that might help to prevent financial difficulty in the future. Affordability can be based on your current or immediate income and expenditure, but only you can predict what might happen in the future.
It’s important to make sure that you are responsible when providing information to your mortgage broker or lender.
Some of the main things to be careful of include:
- Don’t exclude things that you know should be included
- Be honest and open about your circumstances
- Listen to advice and make sure that you double check your information
- Let lenders or advisors know about any future potential issues
- Consider your own affordability and be realistic
Note: it’s easy to get drawn in to wanting to borrow more. This can be to buy a more expensive house or to be able to make a purchase. You should get advice from a highly recommended mortgage expert who can advise you on how much you can borrow on your mortgage.