Hoping to buy a property but not sure how much mortgage you'll be able to borrow?
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.
If you'd like personal, impartial advice on how much mortgage you'll be able to borrow, call Which? Mortgage Advisers on 0808 252 7987.
Mortgage calculator: how much can you borrow?
How do mortgage lenders decide how much you can borrow?
The amount you're able to borrow from a mortgage lender will largely depend on how much you can afford to pay back.
As a rule of thumb, banks and building societies will let you borrow up to four-and-a-half times the total income of you and anyone else you're buying with. Above this threshold, regulations are in place to limit borrowings.
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.
It's still possible 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% deposit to buy.
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.
You can see how much a rate rise would affect your mortgage payments by using our mortgage interest rate calculator.
In general, lenders will check to see if you could withstand at least a three percentage point rise in rates.
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.
Free consultation with a Which? mortgage expert
While there are some general rules that help you work out roughly how much mortgage you might be able to borrow, the exact amount will always be unique to you and your personal circumstances.
For an accurate understanding of how much you can borrow, talk to Which? Mortgage Advisers on 0808 252 7987.
Correct as of date of publication.