About your mortgage: how much can I borrow?
It depends on your income, expenditure, and your deposit. Here’s the lowdown on what you can expect to afford.
Last updated on
Oct 15, 2024 14:20
Buying a home but not sure how much you can borrow? You’re not alone. It’s one of the most common questions asked at the start of the mortgage process.
While there’s only one way to find out exactly how much you can borrow (by applying to a lender and going through their affordability assessment) ), there are a few guidelines you can follow to arrive at a good estimate. Calculators at the ready!
Generally speaking, there are three things lenders will use to decide how much you can borrow:
To work out how much you can afford, lenders do a simple calculation based on a multiple of your income. It’s known as your loan-to-income ratio. These days, it’s usually capped at 4.5 times your annual income.
Example: If your household income is £60,000 annually, you could likely borrow up to a maximum of £270,000 (that’s a 4.5 loan-to-income ratio). Likewise, if you’re making £25,000, your max mortgage amount is probably £112,500. (Keep in mind that being able to borrow up to your maximum amount depends on lots of factors – your income, outgoings, credit history, employment situation, and more.)
Next, lenders will look at your outgoings, with 3 main things in mind:
Lenders won’t want to lend more than they think you can repay each month. So, if your outgoings have been high in recent months — for example, you’ve bought a new car — you may not be able to borrow as much as you thought.
Finally, a lender will want to know if you can keep up with repayments if your circumstances, or mortgage interest rates in general, change. This is called a mortgage stress test. They’ll look at your mortgage affordability (i.e. how much you can comfortably afford to borrow) if:
If a lender thinks you’d be unable to make your repayments when faced with one or more of those scenarios, they could limit the amount they’re willing to lend.
Note: With these criteria in mind, it’s often a good idea to keep a bit of a buffer between the maximum you can afford to borrow and what you ask for. This should help you smash the stress test with ease.
Sometimes you can borrow more if you fit some specific criteria. However, since 2020, lots of lenders who allowed people in these cases to borrow more have changed their rules, so check with them or your broker first:
If you’re self-employed, you should be able to borrow the same amount as those who are full-time employees. However, as a sole trader, contractor, freelancer, or entrepreneur, you’ll probably have to jump through a few more hoops to prove your income.
As part of your affordability checks, you’ll need to supply:
Strictly speaking, the same affordability rules and loan-to-income calculations apply. But, to prove your income, a year of payslips won’t cut it. Lenders usually want to see your average income over the past 2 to 3 years. That said, if you've been self-employed for less than 2 years, there are some lenders who are happy to take one year of self-employed income (like Habito!).
Meanwhile, if your income has shown signs of growing, lenders will likely see this as a good sign. But they’ll want to be sure you can expect to earn the same amount in the coming years, so any contracts showing upcoming work can help convince them.
For retired people, the amount you can borrow will still depend on your incomings and outgoings. That means making sure your pension pot, your workplace pension, or your investments can cover the costs of a mortgage.
However, lenders tend to be a little more hesitant when lending to people who are retired or soon-to-be-retired. That’s because you’re less likely to have a regular income.
The amount you can borrow on a buy-to-let (BTL) mortgage works a little differently from their residential counterparts. Alongside the normal affordability criteria, you’ll need to consider:
You can read more about buy-to-let mortgages here.
Want a personalised assessment of how much you can borrow? Get a mortgage in principle (MIP). An MIP is a certificate from a lender or broker that tells you how much you could borrow based on your circumstances.
An MIP gives you clarity on what you can afford, and gives you a bit more credibility when you make an offer on a home. While it doesn’t guarantee what you’ll be able to borrow (you can only know that through a full affordability check), it can show that you have your financial ducks in a row. And the best bit? It’s free and takes only a few minutes. No credit check necessary. Get started with an MiP here, or use our mortgage calculator to get a rough idea first.
Buy-to-let and standard mortgages are similar in lots of ways, but there are a few crucial differences. Learn all about them here.
A short guide to everything first-time homebuyers need to know, including how to make an offer on a property and what happens when it’s accepted.
A short guide to everything first-time homebuyers need to know, including how to make an offer on a property and what happens when it’s accepted.
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