Saving and scrimping to be able to buy your dream home? Wondering how much you could actually borrow? You’re in the right place!
Here, we’ll show you how to work out roughly what you can borrow for a mortgage. And we’ll reveal what mortgage lenders will look at when they’re deciding how big a mortgage to give you (lenders are the people that give out mortgages). Enjoy!
How much can I borrow for a mortgage?
First things first, every lender is different. So, they’ll each have their own unique criteria for deciding how much they’ll be willing to let you borrow.
However, as a general rule of thumb, lenders will let you borrow roughly 4.5 x your income (before tax). That means to work out roughly how big a mortgage you can get, you can take your yearly income and multiply it by 4.5.
Let’s look at an example. Say you earn £24,000 per year. That means that, on your own, you can probably borrow around £108,000 (24,000 x 4.5 = 108,000).
Now let’s say you’re teaming up with someone else to get a joint mortgage (that’s where you buy a home with at least one other person, normally your partner). If you earn £24,000 per year and they also earn £24,000 per year, you’ll probably be able to borrow around £216,000. That’s because between you, you’re earning £48,000 (and 48,000 x 4.5 = 216,000). Simple!
Of course, lenders will do lots of other checks besides just looking at your salary and the exact amount you can borrow will depend on your personal circumstances. To get a clear idea of exactly how much you could borrow, you’re best off chatting to a whole-of-market mortgage broker (also known as a mortgage advisor).
They’ll take the time to understand your personal circumstances and will be able to compare all the different types of mortgages, mortgage deals and mortgage lenders out there, to see how much you could borrow for your mortgage (and to find you the best deals!).
If you're not sure where to find one, check out Habito¹ – a free, online mortgage broker, with great service. Or, if you prefer to speak to an advisor, check out Tembo¹, you could be chatting with an expert in just 10 minutes.
Use a mortgage calculator
If you’re just looking for a quick indication of how much you can borrow, you can use a mortgage calculator. Our favourite one is Tembo’s mortgage calculator¹ – it’s super fast, and will show you options to borrow even more.
It will even then show you which mortgages you might be able to get and the monthly mortgage payments and interest rate. It’s pretty cool. And free. (Habito¹ is a great online mortgage broker and is completely fee free.)
Mortgage calculators will just give you a rough idea about how much you can borrow. There is a bit more to it, and each mortgage lender can be a bit different when it comes to their borrowing criteria (technically called an affordability assessment). Let’s run through what could impact your mortgage borrowing.
What impacts how much I could borrow for a mortgage?
Okay, so you know how we said that it’s not quite as simple as just multiplying your salary by 4.5? Well, most lenders will look at some key areas besides your income when they’re deciding how much they’re happy to lend you. Here are the main ones.
Affordability is all about how much a lender thinks you’re going to be able to afford each month in repayments. Think about it: if you were lending someone money, you’d want to find out whether they had a decent chance of being able to pay it back – right?
Well, lenders are the same. They want to make sure that you’re going to be able to afford to keep up with the repayments before they agree to give you a mortgage.
This is where those checks on your salary come in. In general, they won’t want you to borrow more than around 4.5 x your income because any more than this and you might not be earning enough to keep up with the repayments.
However, they’ll also look at your expenses. After all, no matter how much you earn, you’re going to struggle to pay your mortgage if you fritter all your money away on fancy cars and nights out! Often, your lender will ask for your bank statements so they can get an idea of how much disposable income you have.
Nuts About Money tip: Watch your spending when you’re thinking about applying for a mortgage. If you can, steer clear of expensive holidays and extravagant purchases for a bit. This way, you can avoid sending potential lenders red flags!
The value of the property you’re buying
It sounds obvious, but you’ll only be able to borrow the full 4.5 x your income as a mortgage if you’re buying a property that’s worth at least that amount. If you’re buying a cheaper property, your mortgage will be for less.
On top of that, most lenders won’t want you to borrow more than 95% of the value of the property you’re buying, known as a 95% loan-to-value ratio (LTV). This means that in order to unlock the full amount of borrowing available to you, you’ll need to be able to save up a mortgage deposit that’s worth at least 5% of the property.
In other words, consider how much deposit you’ve saved. If you don’t have a deposit big enough to cover 5% of the property you’re looking at, you’ll normally need to set your sights on a property that’s worth less and, therefore, borrow less money from your lender.
Your credit score is a number lenders use to find out how good you’ve been with money in the past. Everyone has one – it’s basically like a footprint of your financial history, where everything you’ve done money-wise is taken into account.
So, why do lenders care about it?
Well, they use your credit score to see how reliable you are with money. If you’ve had trouble with money in the past, like struggling to pay other loans back, they’ll see this as a sign that you might struggle again. And they’ll often be less willing to lend to you as a result.
Don’t worry. If your credit score’s not in great shape, this doesn’t necessarily mean you can’t get a mortgage. However, it might mean that you can borrow less or that you need a bigger deposit to persuade lenders to approve you for one.
We’d always recommend using a mortgage broker to help you find the best mortgage for you. However, this is all the more important if you have a bad credit score, as they’ll be able to advise you on which lenders are most likely to approve you and they’ll also handle the application for you to make sure it’s as strong as possible.
We’ve already talked about the fact that your salary will affect how much you can borrow. But did you know that your job can also have an effect on how willing a lender will be to give you a mortgage?
Think about it: if you’re in a salaried job, you’ll usually get paid the same amount every month and you’ll have payslips to prove it. If you’re self-employed, however, your income is more likely to go up and down each month, based on how much work you’ve had. Similarly, if you’re on a fixed-term contract, you may well have periods between jobs where you’re out of work.
This means it can be a little bit trickier for the self-employed or for people on fixed-term contracts to get mortgages (although it’s still totally doable!).
For instance, you’ll normally need to be self-employed for around 2 years before applying for a mortgage, or 12 months at the very minimum if you’re very lucky. This is because most lenders will want to look at your accounts from the last 2 or 3 tax years (compared to salaried employees who normally only need a few months of payslips!). You might also need to put down a bigger deposit.
Similarly to people who have bad credit scores, you’ll generally have fewer lenders to choose from if you’re self-employed or a fixed-term contractor. So, we’d always recommend talking to an experienced mortgage broker who can point you in the direction of suitable lenders.