Getting a mortgage
How much can you borrow?
By Marie Kemplay
Article 1 of 9
How much can you borrow?
Find out how much a bank is likely to lend you and how the 'loan-to-value', or LTV, affects your mortgage deal
You’ve found your dream home at the ideal price. The search is over - but now it’s down to the banks. Can you borrow enough to secure that perfect property?
Mortgage lenders decide how much to lend you by carrying out an ‘affordability assessment’. Essentially, this involves looking at how much you earn, where you spend your money, and whether or not you can afford to pay back your loan.
As a rule of thumb, a bank or building society will typically lend you between three and five times your income - but this isn’t set in stone. Lenders will also look at other factors, such as whether you would still be able to afford the loan if interest rates increased.
- Call Which? Mortgage Advisers on 0808 252 7987 for personal, impartial advice on the best mortgage deal for your personal circumstances
How the loan-to-value, or LTV, affects your mortgage
The deal you get from a mortgage lender is generally based on the share of the property value you’re planning to borrow on top of your deposit. This is known as the 'loan-to-value' ratio, or LTV.
So, if you are buying a property for £200,000 and borrowing £180,000, your LTV is 90%.
Here's a handy table to show you what LTV you’ll have based on the deposit you’ve saved.
Lenders will set a maximum LTV for each deal they offer - for example, you may only be allowed to borrow 75% or 90% of the property's value. In general, the lower your LTV, the lower the mortgage rate, and the cheaper the overall deal.
Of course, you’ll still be able to get a mortgage with a smaller deposit. However, virtually no lenders offer anything more than a 95% LTV mortgage, meaning you need at least a 5%.
Mortgage calculator: how much can I afford to borrow?
Click on the link below to download the Which? mortgage affordability calculator. This calculator will help you to figure our how much you can afford to spend on mortgage repayments each month, based on your monthly income and outgoings.
Affording your mortgage repayments and your LTV
A mortgage is a long-term investment, so you also need to think long-term about your expenses. When deciding how much you can afford, it's important to consider any expenses you may face in the future as well as your current circumstances.
Lenders will commonly ask you if you plan to have children, start a business or put your parents into care. These major life changes could dramatically impact your ability to repay your mortgage debt.
Our mortgage affordability calculator lets you factor in the cost of these future expenses to see what impact they would have.
The effect of interest rates and your LTV
Interest rates have an enormous impact on how much you can afford to borrow. If you have a variable-rate mortgage, the interest rate on your monthly repayments is likely to fluctuate throughout the length of your term.
While the Bank of England base rate is at a historic low, and is unlikely to increase in the immediate future, that may not be the case in five, 10 or even 20 years’ time.
As such, lenders will consider whether you could handle an interest rate rise as part of their affordability assessment, by as much as 3%. Our calculator allows you to factor that in when you're working out what you can afford.
Higher-lending charges for high-LTV mortgages
If you're putting down a deposit of 25% or less, you might have to pay a ‘higher-lending charge.’ Depending on the circumstances, this could amount to hundreds or even thousands of pounds.
Lenders tend to apply these charges to protect themselves against the risk of you falling short on your payments. Generally, high-LTV mortgages are more likely to attract higher lending charges - the higher the LTV, the more likely an applicant is to default. However, most lenders no longer charge these additional fees.
Where higher-lending charges are applied, they are normally calculated on the amount you have borrowed above 75% of the property's value.
The formula is generally:
Amount borrowed - (House price x 0.75) = Amount the higher-lending charge is calculated upon.
As an example, if you are buying a house at £200,000 with a 10% deposit, meaning a LTV of 90%:
- House price: £200,000
- 75% of value: £150,000
- Amount borrowed: £180,000
- Excess above 75%: £30,000
A typical charge might be 6% of this excess amount, so you would pay £1,800.
You should consider the potential cost of higher-lending charges when choosing your mortgage. Keep in mind that if you add the charge to your mortgage, you will end up paying interest on it for the life of the loan.
Need a mortgage?
Working out how much a mortgage lender will lend you can be tricky and will be based on your personal circumstances.
Our independent mortgage advice service, Which? Mortgage Advisers, takes the time to understand your situation and guide you through the whole journey to make it as stress free as possible. Call one of our expert advisers on 0808 252 7987.
- Last updated: April 2017
- Updated by: Marie Kemplay