Before you start looking for that dream home, you need to know how much you're able to borrow in order to fund it. That way, you can search accordingly. Generally, how much you can borrow will depend on four things:
1. The amount you want to borrow in relation to the property's value (also known as the loan-to-value or LTV)
2. Your credit score
3. Your income
4. Your outgoings
But really, the question should be: “How big a mortgage can you afford?” Although the lender is ultimately responsible for checking whether you can afford it, making sure you can easily manage the repayments you're taking on will give you valuable peace of mind.
You should be able to comfortably afford the mortgage when you take it out so that unforeseen events (such as interest rate rises or redundancy) don't put your home in jeopardy later on. Sometimes your feelings on how much you can afford can be at odds with a lender's, so make sure you know what a lender looks for to avoid the frustration of not getting the mortgage you want.
The value of a mortgage broker
At this point it's worth mentioning the value of an independent mortgage broker. Because brokers work closely with a number of different lenders, they know the ins and outs of the different lending criteria each mortgage provider has. This has a distinct advantage over doing it yourself as it can save you time, as well as money if a mortgage lender later declines to give you the mortgage you want.
1. How loan-to-value affects the size of mortgage you qualify for
Loan-to-value, or LTV, means how much the mortgage is in relation to the value of the property. So, if you have a £50,000 deposit for a £200,000 property, the mortgage you need would be £150,000 – 75% of the property's worth, or 75% loan-to-value.
Mortgage lenders will specify an upper LTV limit for each of their mortgage products. This does not mean that you will necessarily be able to borrow this amount – that will depend on your credit score, your income and your outgoings.
2. How your credit score affects the size of mortgage you qualify for
Your credit score has a big part to play in how much you can borrow. In the most extreme cases a low credit score could prevent a mortgage lender from even considering you or, more likely, a low score could mean that the lender uses a lower multiple of your income to decide how much you can borrow.
That’s why you’ll want to make sure your credit score is up to scratch before you even consider applying for anything.
3. How income affects the mortgage you qualify for
Income is crucial for determining how big a mortgage you can have. Traditionally, mortgage lenders applied a multiple of your income to decide how much you could borrow. So, if you earn £30,000 per year and the lender will lend four times this, they may be willing to lend £120,000. (Remember that each lender will have different criteria and will offer different income multiples, so always do your research.)
When it comes to households with two incomes, some lenders offer a choice:
The option to add the second income on top of the multiple, so if the main breadwinner earns £30,000 and the second person's income is £15,000 a lender might offer 4 x the first income, plus the second income (4 x £30,000 + £15,000 = £135,000)
or
A slightly lower multiple for two incomes than for one. So £30,000 + £15,000 = £45,000. Then £45,000 x 3 = £135,000
Many lenders now only use income multiples as an overall maximum that they will lend, conducting a detailed affordability assessment to decide how much they are willing to lend. This is something that has become particularly strict following mortgage regulations introduced in 2014.
If part of your income is comprised of a bonus or overtime, you may not be able to use this, or if you can, you may only be able to use 50% of the money towards what the lender deems as your income. All income you declare in your mortgage application will need to be provable – usually through you providing your latest pay slips, pensions and benefits statements.
4. How outgoings affect the size of mortgage you qualify for
Your regular household expenses, debts and insurances can all affect what a mortgage lender will let you borrow. Outgoings that a lender may take into consideration include:
Loan and credit card repayments, Council tax. Domestic utilities (gas, electricity and water), Insurances (buildings and contents, car, life, payment protection), Car running costs (tax, insurance) or Child maintenance payments.
Some lenders also apply a reduction to the amount you can borrow for the number of children you have (assuming an average monthly expense), while others have started to take things like discretionary spending into account. They'll also require you to prove that you can afford the repayments in the event of an increase to interest rates, so make sure you have suitable means to ensure that – ideally through reducing your unnecessary expenditure – as this could have a clear impact on the amount of mortgage you'll be able to borrow.
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