If you’re thinking of buying a property, one of the first things you need to know is how much you can afford to spend. This allows you to house hunt realistically and make a timely offer once you’ve found ‘the one.’
Before you go to the bank and ask: “how much can I borrow?” it’s worth understanding how lenders calculate their figures. This could give you an idea of how much a lender might be willing to give you or help you make changes to increase their offer.
Mortgage affordability
Mortgage affordability is your ability to meet all your monthly payment obligations including your mortgage. It takes into account your income, expenses, debts and the amount you’d like to borrow.
Essentially, lenders want to make sure they’ll get their money back so won’t offer more than they calculate you can afford to repay.
How much mortgage can I borrow?
There are several key factors that affect how much you can borrow:
1. Income
Your salary, bonuses and other income sources, e.g. rental income. Lenders will want to see evidence such as payslips if you are employed, accounts if you are self-employed, and bank statements to confirm your income.
2. Living expenses and outgoings
They’re not just being nosy: your mortgage lender will want to know what you spend your money on each month. That will include things like car finance, utility bills, food shops, gym memberships, TV subscriptions etc. Anything that eats into your monthly income will be added up to help calculate DTI…
3. Debt-to-income ratio (DTI)
Your DTI is a very important factor for lenders. It calculates your ability to manage all your monthly payments and is calculated by dividing your monthly debt by your gross monthly income, then multiplying the figure by 100 e.g.
DTI ratio = £1,500 monthly payments / £5,000 monthly income x 100 = 30%
This person has £1,500 in monthly outgoings including their hypothetical mortgage, credit card payments, phone bills etc., and a monthly income of £5,000. This gives them a DTI ratio of 30%. As a guide, a DTI ratio of up to 39% is generally considered acceptable risk and the borrower should be able to secure a mortgage with normal terms. A DTI over 50% is considered high risk as the lender could assume you’ll struggle to meet all your financial obligations. The borrower may face high interest rates, fees, or struggle to secure a mortgage at all.
4. Credit score
Everyone has a credit score which is a number usually between 300 and 999 . It is calculated by assessing your borrowing/repayment history and gives an idea of how reliable you are at paying off debt.
Mortgage lenders are very interested in credit scores and the bigger the number, the better. Lower scores are less likely to make you eligible for a mortgage and/or may affect the terms and interest rates offered.
5. Deposit size
The larger your deposit the happier your mortgage lender will be. A large deposit relative to the property price demonstrates you are able to manage your money well while decreasing the amount you want to borrow in the first place.
6. Loan-to-value (LTV) ratio
Closely linked to deposit size is LTV: a very important factor. LTV is the percentage of the property price you need to borrow as a mortgage once you’ve deducted your deposit. To calculate the LTV ratio, divide the mortgage figure by the price of the property, then multiply by 100 e.g.:
Someone wants to buy a £300,000 house and has a £30,000 deposit saved.
£300,000 – £30,000 = £270,000, so they’ll need a mortgage for £270,000.
£270,000 mortgage / £300,000 property price = 0.9
0.9 x 100 = 90
So, their LTV ratio is 90%
Your LTV is likely to affect the terms and interest rates a lender will offer. Generally speaking, the lower the LTV, the lower the interest rate as these loans are seen as lower risk by the lender.
7. Employment history
Your lender will want to know about your job including your salary, type of employment and length of employment. Again, they are looking to see if your mortgage repayments will be reliable. They will only lend money they believe you can afford to repay.
If you are a freelancer of self-employed, they will want to see records of your income dating back at least a couple of years by way of accounts and/or tax payments and bank statements.
How much mortgage can I borrow?
xAs a general rule, lenders offer 4-5 times your annual income as a mortgage. For example, if your annual income is £50,000, you can hope to get a £50,000 x 4 = £200,000 mortgage.
Different lenders may offer different amounts and terms, and have different mortgage products available, so it is worth shopping around. All mortgage lenders will look at the list of factors above, such at income and DTI to decide if, how much and what terms to offer.
The type of mortgage you opt for may also affect how much you can borrow. Choosing a mortgage with a longer repayment term will reduce monthly repayments but you’ll be paying it back for longer. This may mean you can borrow more (but you’ll pay back a bigger total because of additional interest).
How to boost mortgage affordability
To get the best offer possible from a mortgage lender, including interest rates, terms and overall amount, there are several things you can do before applying for a mortgage:
- Increase your deposit: save as much as you can to prove your financial reliability and reduce overall borrowing.
- Decrease your Loan To Value ‘LTV’ ratio: increasing your deposit and/or choosing a less expensive house will reduce your LTV ratio.
- Improve your credit score by making payments on time; closing credit card accounts you don’t use; not applying for too much credit; cutting ties with people who have bad credit e.g. joint bank accounts; registering to vote, proving your name and address and reducing perceived risk of fraud.
Find out more
Asking yourself: “how much can I borrow?” is a great first step as you think about your mortgage options. If you have a rough idea of your own mortgage affordability, it puts you in a great position when looking at prospective houses to buy. Understanding the factors that impact the amount you will be able to borrow also gives you the opportunity to make changes such as saving more or improving your credit score before making that application. Most Estate Agents will now expect you to have found out your borrowing capacity prior to viewing properties. The best way to know for sure is to speak to an independent mortgage adviser.
If you have any questions about mortgage affordability, we are here to help. Please get in touch with our friendly team who are ready to answer all your questions.
YOUR HOME MAY BE REPOSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.