Hoping to buy a property but not sure how much you'll be able to borrow for a mortgage?
This guide explains how mortgage lenders assess affordability, how loan-to-value ratios work, and how much lenders are likely to offer you for buying a property.
Mortgage calculator: how much can you borrow?
How do mortgage lenders decide how much you can borrow?
The amount you can borrow will be heavily influenced by your salary and your month-to-month expenditure.
How income multiples affect your borrowing chances
Banks and building societies will usually lend up to four-and-a-half times the total annual income of you and anyone else you're buying with. For example, if your total household income is £60,000 a year, you might be offered up to £270,000.
However, some mortgage lenders do offer larger amounts to people in certain professions or those with higher earnings.
For example, some 'professional' mortgages will let borrowers with specific jobs (such as doctors, dentists etc) borrow five or five-and-a-half times their salary. Alternatively, if you have a household income of more than £80,000, you might find some banks will offer you a higher multiple.
In some cases, the income multiple you'll be eligible for can also depend on the loan-to-value ratio you're borrowing at. So if you're applying for a 75% mortgage, you might be able to borrow more than if you're applying for a 90% deal.
Following the coronavirus outbreak, some mortgage lenders have begun to impose stricter rules on how much you can borrow. For example, Barclays will now only offer loans up to four-and-a-half times annual salary, compared to the five-and-a-half times salary available to some customers before the pandemic.
How affordability assessments work
When deciding how much to lend you, a mortgage provider will do an 'affordability assessment'. Essentially, this means looking at the amount you typically earn in a month compared with how much you spend.
Lenders are also interested in the types of things you spend your money on. Some expenses can be quickly cut back, while others are less flexible - a gym membership, for example, may be easy to cancel whereas childcare costs are likely to be fixed.
Your lender will ask about things such as:
- Regular income from paid work
- Any benefits that you receive
- Income from other sources
- Debt repayments such as student loan or credit card bills
- Regular bills such as gas and electricity
- Transport costs
- Grocery costs
- Spending on leisure activities
The lender will also compare what you say with recent bank statements and wage slips. See our 'Applying for a mortgage' guide for more detail on the documents you'll need for an application.
What does 'LTV' mean?
The deals you're offered when applying for a mortgage will usually be affected by the loan-to-value ratio or 'LTV' - ie the percentage of the price that you're borrowing compared to how much you're putting in yourself.
This means that if you have a 10% deposit, your LTV will be 90% as your mortgage will need to cover 90% of the property price. With a 15% deposit, your LTV will be 85%, and so on.
Lenders will set a maximum LTV for each deal they offer - for example, a particular interest rate may only be available to those with an LTV of 75% or below.
In general, the lower your LTV (ie the more money you're putting in yourself), the lower the mortgage rate, and the cheaper the overall deal.
In the wake of COVID-19, it's become much harder to get a low-deposit mortgage. The majority of 90% and 95% mortgages have been withdrawn, and those that remain come with stipulations.
This means that if you have a deposit of less than 15% of the property's purchase price, you might be better holding off until the mortgage market stabilises and more deals return.
How could interest rates affect how much you can borrow?
Interest rates will play a deciding role in how much you can borrow. Lenders won't just look at what you can afford to repay at current interest rates - they'll also 'stress test' to see what you could pay if rates increased.
In general, lenders will check to see if you could withstand at least a three percentage point rise in rates.
You can see how much a rate rise would affect your mortgage payments by using our mortgage interest rate calculator.
If you have a fixed-rate mortgage, interest rate changes won't affect you until your fixed rate comes to an end. However, if you have variable-rate mortgage, the interest rate on your monthly repayments could go up or down during the term of the mortgage.