Updated 03 December 2020
As a rule of thumb, you can borrow up to 4 and a half times your income – so combined earnings of around £55,500 should in theory enable you to get a £250,000 mortgage. However, affordability rules are slightly more detailed than that, and other factors may come into play. Here you can get a clearer idea of how much mortgage you could get, and what your monthly repayments might be.
Use our Mortgage Calculator to find out how much you could borrow, how much it might cost a month and what your loan to value ratio would be.
Several factors influence how much you’ll be able to borrow. These are:
Let’s look at these in turn.
Loan-to-income ratio is the total size of your mortgage loan compared to your annual income (that is, the combined annual income of all the buyers named on the mortgage). These days, the maximum you can borrow is 4.5 times your total annual income. In rare cases, some lenders may offer more for a limited number of customers. Conversely, they may not offer you this much.
Here’s an example:
You and your partner have a combined income of £56,000. Multiplied by 4.5 this gives £252,000. So (on paper) this is the upper limit of what you’ll be able to borrow.
Knowing the maximum you can borrow doesn’t mean you will definitely achieve this size of mortgage. Your lender will have to consider the two other main factors: loan-to-value ratio and affordability.
LTV ratio is the other crucial ratio to think about. It means, ‘How much of your property’s total value is being covered by the mortgage loan?’ A low loan-to-value ratio usually means you can borrow more, and a high ratio will be more restrictive.
LTV ratio is determined by how much deposit you have, or (if you’re not a first-time buyer) how much of your current property is owned mortgage-free – i.e. how much equity you have. Also, if you’re selling one home to buy your next, you can further improve your LTV ratio by using savings as an additional deposit.
LTV ratio is often talked about in terms of a percentage – e.g. ‘ an 80 per cent mortgage’ means you have covered 20 per cent of the property’s price using cash or equity, and the remaining 80 per cent with a mortgage. In other words, a high percentage mortgage is the same as a low LTV (this can be a bit confusing at first!).
But there is a very easy way to remember it: the more cash you can offer up front, the more you’ll be able to borrow. The less cash you have, the less you can borrow.
Generally, lenders are comfortable with 80-85 per cent mortgages or below, so if you have enough deposit to cover 15-20 per cent of your property’s price, you should be able to borrow up to 4.5 times your income.
However, other factors still needs to be considered, such as affordability.
Your lender wants to make sure you can afford your mortgage repayments not just on paper, but in practice. This means that they will look at your other outgoings and spending – both essential and non-essential – to determine how much you can really afford.
For example, if you work in a city but your home will be outside that city, you will have to spend money on commuting. This is an essential expense (you can’t eliminate it) so your income is effectively reduced. The lender will want assurance that you can afford both your mortgage repayments and (say) £200 a month in train tickets.
When making your mortgage application, you’ll have to reveal how much you typically spend per month, as accurately as you can. A good tip is to reduce your non-essential spending as much as possible in the months before you apply (if you’ve been saving for a deposit, you’ll probably have been doing this anyway). Also see how much you can trim your essential spending – try shopping in cheaper stores, swapping the train for a bike, etc.
Provided you can show a regular surplus each month that would comfortably cover your monthly mortgage repayment, you should be able to borrow the amount you want.
Several other circumstances may help determine whether or not you can borrow the full 4.5 times your income. These are:
You’ll need a good history of borrowing and repaying money. Find out what can affect your credit score and how to improve it.
Lenders prefer borrowers to have steady, predictable sources of income. This means it can be harder if you’re self-employed, or in a profession considered to be less secure or more risky. Find out about getting a mortgage if you’re self-employed.
There is no set age limits on mortgages, but lenders tend to have their own cap, sometimes as low as 55. A steady sufficient income for the next 20+ years can be difficult to prove if you’re in your late 50s or older.
The cost of your mortgage repayments will vary, depending on the type and length of mortgage deal you’re offered and the rate of interest you can secure.
If you’re on a fixed rate mortgage, the size of your repayments will be the same for the duration of the deal period (usually two to five years, sometimes longer). If you’re on a variable rate mortgage (such as a tracker, discounted or SVR mortgage) then your interest rate – and therefore your repayments – can vary. However, the very lowest interest rates are often found with tracker mortgages, if the Bank of England base rate is low. If you’re ready to take the risk, this could make your mortgage more affordable.
Most mortgages are fully repaid over 25 years, but you can opt for a longer or a shorter mortgage term. Your mortgage term could be as long as 35 years, or as short as five years (this often applies when someone remortgages for the last time).
Longer mortgage terms generally mean lower monthly repayments, as you have longer to pay off the loan. Against that, the total amount you repay will be greater – for the same reason.
Here’s an example:
A £250,000 25-year mortgage with a 2 per cent fixed-rate deal would mean an initial monthly payment of £1,060. However, the same mortgage on a 15-year term would mean an initial monthly payment of £1,609.
However, assuming you could keep 2 per cent interest (by regularly remortgaging), with the 25-year mortgage you would repay £318,000 in total – but with the 15-year mortgage you would repay only £289,620 in total.
Your best chance of being able to borrow the maximum you can afford is to use a mortgage broker. Your broker will give you independent advice on the best deal for you and will help you with every stage of your application. An independent mortgage broker also has access to more deals than you’ll find on the high street or online, so you’ll know you really are getting the best deal you can achieve at this time.
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