How much can I borrow for a mortgage?
Being approved for a mortgage takes more than your current income into account. Lenders also want to be sure you have stable earnings prospects when rates and circumstances change. This determines what you’re able to borrow and keep paying for. Follow our walk-through to answer, “How much can I borrow for a mortgage?”
How do lenders decide how much I can borrow?
Several factors will likely be scrutinised before approval. Lenders look at your income streams and any outstanding debt, building a picture of what you can reasonably afford in the short and long-term.
This tends to consist of:
- A salary from PAYE or self-employment incl. dividends.
- Gains from investments such as shares, bonds, pensions and rental income.
- Any bonus payments or freelance work.
- The amount you’ve been saving for the mortgage each month.
- Trends across your living expenses.
- Liabilities such as current loan repayments, utility costs, insurance premiums and credit card bills.
A mortgage lender will be meticulous in their assessment. That means they’ll ask for financial evidence going back at least several months. They’ll use these figures to not only determine what you can afford today, but also whether you can keep paying for the mortgage if life takes a turn — for example, if you have a child, lose your job or support a dependent in the family.
How much can I borrow for a mortgage times my salary?
You’ll almost certainly be given a maximum amount you can borrow that’s proportional to your income. Usually, this is 4-4.5 times your salary. Therefore a salary of £45,000 could put you in line for a mortgage worth £180,000 to £202,500.
Each assessment counts for the individuals applying for a mortgage i.e. one half of a couple. So, if you’re applying together, they’ll multiply your wage and your partner’s for a combined total.
Some lenders go up to 5 times your salary. However, bear in mind that these mortgages are harder to obtain, since lenders consider them a riskier investment. Also, remember that risk rises with a smaller deposit. If you’re seeking to borrow more than 80% of the property value, you’ll have to face bigger interest rates.
How to increase your chances of getting a mortgage approval
While every lender has their own slight preferences, you can always make moves to strengthen your chances of being approved. Don’t try to find out how much you can borrow for a mortgage without:
Raising your credit score
Your standing with any of the UK’s three main credit agencies — Equifax, Experian or TransUnion — is one of the best indicators for how reliably you can cover debt. So, before applying, run a free credit check.
These agencies have their own scoring systems determining what’s good, excellent, fair or poor. You’ll want to be in at least the ‘good’ percentile. If you aren’t or want to boost your rating to ‘excellent’, try to make more repayments on time and take out a credit card, starting small and scaling up. Registering for the electoral roll can also help your credit score.
Preparing payslips and paperwork
Traditionally, lenders want to see three months of payslips from the date you’re applying. But they’ll also want to view your P60 — the end-of-year tax statement from HMRC. If you’re an employee, your employer should be able to find it in their records. Meanwhile, retrieve your signed employment contract, which is particularly important if you’ve taken a new job.
Self-employed applicants, on the other hand, must fish for their SA302 or contact HMRC for a replacement. There’s extra pressure on your bank statements too. Prepare at least two years of financial evidence to prove stable cash flow. If you’re self-employed and own a limited company, lenders will likely ask for at least two years of accounts.
Staying in the same place
Moving regularly from one address to another in the span of several years can negatively affect your mortgage prospects. Why? Because it’s another sign of instability. Lenders like seeing a comfortable, continuous rental agreement that demonstrates you can stay in a property for a while and afford it.
Should I take out a larger mortgage if I can afford it?
Although an 80% loan to value (LTV) ratio is the norm, paying more upfront is worth the effort. You’ll have a better shot at a mortgage deal as well as more favourable lending terms. Even paying for 25% of the property yourself to begin with is a huge sign of confidence from the lender’s perspective. That’s why the interest rates will be lower.
For comparison, consider that at the time of writing, a 90% LTV carries initial fixed two-year rates upwards of 6%. By contrast, most introductory 70% LTV interest rates will be around 5.7-5.8% on a loan that’s 20% smaller overall. This could save you tens of thousands of pounds in the decades ahead.
What’s the smallest mortgage you can get?
It depends what you’re trying to buy and average prices in the area. However, the lowest mortgage you’ll find tends to be anywhere between £20,000 and £50,000. Some lenders will go even lower, but they’re exceptionally rare.
These mini mortgages are useful because they carry very little risk to you and the lender. They allow buyers with a bad credit history or other impediments to a more traditional mortgage to be approved and fulfil part of the asking price.
What other factors impact how much I can borrow?
There are a few more variables to think about. They might tip the scales towards a successful application.
Contracting evidence
Banks and other institutions don’t want to penalise contractors, but they do want proof of any upcoming work you have, ensuring your earning potential meets the mortgage demands. Signed service agreements on fixed-term contracts are always useful as evidence.
The property’s condition and classification
Damp, rot, flooding, faulty foundations and other structural problems may reduce the amount of money you’re able to borrow. They’re another set of risks that could negatively affect the investment.
Additionally, you might be dealing with ‘non-standard construction’, which is a label for properties that haven’t been built from bricks and mortar, for example high-rise apartments, thatched cottages and timber homes. Unless you’re using a specialist lender — and there are plenty in the UK — you might struggle to gain a large enough mortgage or any at all.
