Banks and building societies used to base mortgage calculations on one thing only: your income.
These days, they look at a whole lot more to make sure you can repay their loan. And that mainly focuses on your outgoings.
How many times my salary can I borrow for a mortgage?
Generally, banks and building societies will lend between 4 and 4.5 times your total household income.
They mainly look at your salary to work this out, though some lenders will also consider overtime, bonuses and commission.
What mortgage can I afford with my salary?
It’s not just your salary that lenders look at when deciding to approve a mortgage request. They’ll also cover:
- Your essential outgoings
This includes all the bills you need to pay like gas, electricity, water and council tax.
But it also includes all the other essential things you need to cover, like travel and commuting costs, school fees, childcare and food.
- Discretionary spending
Next, they’ll move onto the fun stuff you like to spend money on. This will be things like holidays, entertainment, shopping, eating out and gym memberships.
Lenders will look at what you’ve been spending your cash on for the three to six months leading up to a mortgage application. So it’s worth getting your accounts in order well in advance of applying.
They want to make sure that you can still afford your mortgage repayments while continuing your current lifestyle.
- Future outgoings
Planning on extending the family any time soon? Lenders will even look into what your future outgoings might be.
So if you’re pregnant or have young children, your lender needs to be sure you can afford that future childcare on top of your current outgoings.
- The deposit
The bigger the amount you’ve managed to squirrel away to buy your new place, the more favourably a lender will look upon you.
Borrowers with large deposits are seen as lower risk. And lenders like lower risk.
They’re much more likely to offer you a bigger loan if you’re borrowing a smaller proportion of your property’s value.
- Your age
Your age also plays a role in how big a mortgage you can get.
Lenders want to be sure that you can repay what you’ve borrowed before you retire.
They’re less likely to lend higher sums to people who are nearing retirement, as your monthly income usually goes down when you’re no longer working.
- Your credit score
Lenders will check your credit score to decide whether or not you are eligible to borrow money.
You can check your own with any of these credit reference agencies (CRAs):
Credit reference agencies gather information about your credit history and use it to build your credit report. Then, they calculate your score.
Do bear in mind that not all lenders report to every CRA to enquire about your credit history. This can mean that one CRA might have information about your credit history that another doesn’t. So there can be discrepancies between their ratings.
Regularly checking your credit report for errors can help to avoid this.
How much can I borrow based on my income?
Interest rates are charged by mortgage lenders throughout the duration of the mortgage.
They vary according to the type of mortgage you take out. And lenders want to make sure that you can still pay them back if the interest rate changes.
Let’s look at what this means and the different types of mortgage available:
What’s a standard variable rate mortgage?
No one wants a mortgage on the standard variable rate.
Banks and building societies generally set their own standard variable rates. And they are often the most expensive mortgages available.
Right now, the best mortgage interest rates for first time buyers are around 2% to 2.5%, according to Moneyfacts.
In contrast, the average standard variable rate, or SVR mortgage, is around 4.3%.
If your mortgage moves over to the standard variable rate at the end of your deal, as many do, your outgoings will suddenly increase. And because it’s a variable rate, your lender can also change the SVR at any time.
Say you borrowed £100K with a 10% deposit at an interest rate of 2%. Over 25 years, your monthly repayments would be £381.
If you borrowed £100K with a 10% deposit at an interest rate of 4.3%, over 25 years, your monthly repayments would be £490. Ouch.
It’s much better to search for another mortgage deal when your one ends, than to put up with paying the standard variable rate.
What’s a fixed rate mortgage?
Fixed-rate mortgages are a popular choice because the interest rate is guaranteed to stay the same for the length of the deal.
That means you’ll know exactly how much you’ll need to repay each month, regardless of what happens to interest rates.
Lenders call this short-term special rate an 'incentive period' and it can be fixed for one, two, three, five, 10 or even 15 years.
The interest rates on fixed rate mortgages tend to go down the longer you fix them for.
So, for a two-year fixed rate, interest rates could be 3.2%, but on a five-year fixed rate, they could be 2.6%
What’s a discount mortgage?
A discount mortgage is where the interest rate is pegged at a set amount below the lender’s standard variable rate (SVR).
They can be set for a period of say, two or five years, or for the whole term of the mortgage.
Like with variable-rate mortgages, discount mortgage repayments could change from month to month.
The interest rates on discount rate mortgages can begin at around 3.7%, according to Moneyfacts.
So, there’s a lot to consider when working out how much you can afford to borrow with a mortgage. It basically boils down to how much you can comfortably repay each month.
How can I find the best mortgage deal?
Once you’ve worked out a sum you’d be comfortable with, it’s time to start looking for a mortgage deal that will suit you.
Alternatively, you might want to contact a mortgage broker, as they often have access to deals that aren't available on the high street.
While banks expect the client will negotiate with them, or accept the given interest rate, mortgage brokers are more likely to go to bat for you, to get a lower one.
They act as a middleman between you and the lenders. And most work with a variety of lenders, including banks, credit unions and private mortgage companies, which allows them to offer you a wider range of choices.
If your credit rating is less than perfect, you’re self-employed or have any other special circumstances, this extra flexibility can be very useful.
Really, having a great mortgage broker is like having a great estate agent: they get you the results you couldn't easily get yourself.