How much can I afford to borrow?
How salary & deposit affect how much you can get
This guide will help you work out how much you're likely to be able to borrow for your mortgage and how much you'll need as a deposit. Your income and the size of your deposit (or equity, if you're remortgaging) both have a fundamental impact on the amount you can borrow and what rate you'll get. But be aware, the coronavirus outbreak has made it tougher than ever for people – especially first-time buyers – to get a mortgage.
Much of this guide was written before the coronavirus outbreak. Since then, lenders have begun tightening their borrowing criteria and pulling back from higher value mortgages. This might mean that you'll find it tougher to borrow the amount you want, or even be forced to consider borrowing less. It's worth bearing this in mind as you read this guide.
Lenders check how much you can afford
Lenders used to just multiply your income by up to five times to work out your maximum mortgage size. Now it's a lot more complicated as the lender has to check the affordability of the mortgage – but in basic terms, this just means whether you can afford the repayments.
But, again, it's still not quite that simple. Under mortgage rules which came into effect in April 2014, lenders must now obey strict guidelines to check whether a borrower can afford their mortgage repayments, not just at current interest rates, but also if interest rates shot up to 6-7%.
- Be prepared for the mortgage interview
Mortgage 'interviews' have got harder. They've always asked about income and big bills such as utilities & debt, but we've heard stories since the changes of gruelling three-hour interrogations where people are asked how often they eat steak. This may be an extreme example, but lenders will likely check these outgoings:
- Gym membership
- Car costs
- Eating out
- Weekly shop
- School fees
Ignore the scaremongering. It's not 'they'll tell you to stop eating steak'. They're judging affordability, so if eating out costs push you over the edge it can be a problem. If you can comfortably afford it, it's not.
Even so, it's best to make it as easy for your lender as you can. Take a look at our Boost Your Mortgage Chances guide for tips on how to do this.
Most look at your spending in the three months before you apply for a mortgage, so if you know you're about to apply, try to live sensibly, and well within your means for several months before. Put up as much as you can for the deposit if it's your first mortgage, as borrowing less means less risk for the lender, and hopefully less close scrutiny for your finances.
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Use our How Much Can I Borrow calculator to estimate how much mortgage lenders might offer you. This is a rough estimate based only on your income, so any significant outgoings, such as child maintenance, debt repayments or school fees, could reduce the amount a lender's prepared to offer you.
You won't get a fully accurate figure until you apply for a mortgage, but if you speak to a lender or a mortgage broker, they should be able to give you an estimate.
It's worth taking a look at the mortgages on offer with MoneySavingExpert's Mortgage Best Buys. From there, you'll be able to benchmark a top deal, and then either find a broker or a lender who'll be able to help you with an estimate of how much you could borrow.
You can then get an agreement in principle (AIP). An AIP is a mini-application to the lender where it asks for some personal details and carries out a credit check to see if it would be willing to lend to you, subject to further checks. It'll also tell you how much it'll lend you.
If you're approved for the AIP, the battle's half over. It means the lender's looked at you, credit checked you, and on the surface, you're someone that it would lend to. But it is only half the battle, because it's not binding on the lender, or on you.
Shall I take the max I can borrow?
If you're buying, you should find out how much you can borrow before you start house hunting, but be clear on how much you can afford.
If you're remortgaging, work out how much you need before finding out what a lender might be prepared to offer. It's easy to get tempted to up the loan size when the lender is willing, but don't exceed what you think is affordable.
Use the Budget Planner spreadsheet to work out what you can afford to repay. If it shows you can't afford a property, don't ignore it.
Only look at properties within your budget and avoid those even a fraction over. If not, you'll either break your resolve or be disappointed.
If you're self-employed or would struggle to prove your long-term income – perhaps you've worked abroad or you are on a temporary contract – then getting a mortgage is tough. You'll need cast-iron proof of your income, which isn't easy.
Unfortunately, the arrival of coronavirus and its economic impact has made getting a mortgage if you're self-employed EVEN tougher. Be prepared to provide evidence to show how your business is faring.
You'll also need to show:
- Business accounts. You need to show preferably three years of accounts – though two can suffice depending on the lender – usually signed off by a chartered accountant.
- Tax returns. If you can't show business accounts then two or three years' tax returns are the next best option.
You'll be assessed on net profits, not turnover. If this is likely to be complex, using a mortgage broker could help as they'll know which lenders require what evidence.
While this can work for those in established businesses, to be realistic, it could mean those who have recently started working for themselves may not be able to get a mortgage. If you're self-employed and your partner isn't, your mortgage may be calculated using their income only.
Note that self-cert mortgages – mortgages where you declare your own income and the lender doesn't require proof, common in the mid-noughties – are no longer available.
If you get bonuses or irregular income, unless the amount is guaranteed, lenders may only count half of this towards your annual salary when determining how much you can borrow. This varies between lenders, though.
An AIP only means that the mortgage lender's taken a cursory glance over your finances and your credit record and not seen anything that would mean it would turn you down.
When it comes to the time to turn an AIP into a full application, the checks a lender undertakes become so much more detailed. It asks for proof of income, it asks for your monthly outgoings and it does a full credit check.
If the lender finds something in this that it doesn't like, it won't lend to you.
The AIP might also not be converted into a mortgage offer because the lender doesn't want to lend on the property you're buying. Some won't lend on flats above shops, or properties constructed with unusual material.
You'll likely need a 10% deposit to get a mortgage and 40% for the best rates
Once you know how much you might be able to borrow, you need to work out what you're able to provide as a deposit (or equity if you're remortgaging).
The minimum you WILL NEED is 5%, but with the arrival of coronavirus and its economic impact, many lenders have temporarily withdrawn from the higher LTV mortgage market. Currently there are very few 95% mortgage deals available for those with a 5% deposit. According to Moneyfacts, the number of 95% mortgage deals have dropped from more than 750 to 70 since the coronavirus outbreak.
Even with a 10% deposit, it may be more difficult than usual for you to get a mortgage. Either way, you'll need to give cast-iron proof that you can afford to pay back a mortgage.
As mentioned, the bigger the deposit/equity, the better the rates will be (the best rates are for those with a 40%+ deposit) and the better your chances of being accepted by a lender. If you are on the borderline of affordability, having more to put down might help the lender to say yes.
- 25% gets you a decent rate
- 40% gets you the top rates
So as a rule of thumb, the more you can save up, the better, as:
"The bigger your deposit, the cheaper the mortgage deal"
On the best-buy tables and comparison sites, you'll see that lenders talk about the LTV (loan to value) ratio. This is the percentage of the property value you're loaned as a mortgage – in other words, the proportion you're borrowing.
To calculate this, simply subtract your deposit/equity as a percentage of the property value from 100%. So if you've a £20,000 deposit on a £100,000 home, that's a 20% deposit. This means you owe 80% – so the LTV is 80%.
Similarly, if you're remortgaging, and you own 20% of the value of your home, you'll need a remortgage deal for the remaining 80% – this is your LTV.
Just in case you're struggling, here's an easy table…
The reason it's expressed this way is so the same terms can be used for those getting a first mortgage and those who want to remortgage.
It's worth thinking about LTVs for a moment. They're not just affected by the amount you put into a house, but also by house prices. This is crucial – by owning a house, you've invested in an asset where the price moves.
A practical example: let's say when you first bought, you had a £10,000 deposit on a £100,000 house – that meant you owed £90,000 at the start. That's an LTV of 90%. After a few years you've paid a little off and now owe £85,000. You're ready to remortgage and the house's value is the same, so your LTV has become 85%.
Yet if the house is now also worth more, say £120,000, then your LTV is around 70% (as it's £85,000 divided by £120,000 multiplied by 100). This means you'll be likely to get a much better remortgage deal. Equally, if the house's value had dropped to £80,000, you'd now owe more than it's worth (negative equity) and you'd be unable to remortgage.
Pumping more of your savings into your mortgage can get you a better rate
Mortgage and remortgage rates are priced in LTV bands – and the bigger deposit/equity you have, the lower the interest rate will be. Mortgage lenders have different prices for loan-to-value bands at 60%, 70%, 75%, 80%, 85%, 90% and 95%. The impact of a lower LTV can save you a huge amount of cash (see table).
|Total payments over two years||£18,780||£15,920||£15,600||£11,820|
|The table is for a house value of £200,000 on a two-year fix, capital repayment basis over a 25-year term and ignores fees. Updated July 2020|
The relationship breaks down below 60% LTV. Someone borrowing 45% of the value of their property will typically pay the same rates as someone borrowing 60%. But if you borrow 61%, you won't be able to get those rates.
If you currently have slightly less than needed to reach one of those LTV boundaries, it's worth scraping together the extra, or – if buying – trying to haggle on the property's purchase price with the seller.
If you're at the top limit of a boundary (eg, 75% LTV), finding a little bit extra for the deposit to push you another 0.1% down (eg, to 74.9%) could improve your chances of acceptance. It could also reduce the amount of paperwork the lender wants to see.
There are two ways to drop an LTV band
1. The first one is very simple – borrow less
Work out how much additional money you would need to put in to drop to a lower interest rate band and see how much interest you'd be saving.
One way you could do this is to overpay your mortgage where you also get the advantage of paying interest on a smaller amount of debt.
And if your LTV falls, it means when it comes to remortgaging, you may be able to get a cheaper deal than if you hadn't overpaid your mortgage.
2. Get your property valued higher
When you apply for a mortgage, you need to give an estimate of the property's current value. You want to get the top value possible, but it needs to be realistic as the lender will get an independent valuer to check it later in the process.
Valuers don't just pluck a figure out of the air, and neither should you. Use our Free House Price Valuations guide to look at houses similar to yours that have sold recently, or maybe even ask a friendly estate agent for their opinion.
It's all about risk for the lender. If you're only borrowing 60% of the property's value, then the lender will be pretty assured of getting its cash back if it had to repossess your property and sell it.
But if you're borrowing 95% of the property's value, the lender is facing more risk. It would only need the property to drop by 5% before it'd likely be facing a loss. It can't be assured of making all its money back.
This is why the rates for 95% mortgages are much higher than the rates for 60% mortgages – you're paying a premium for risk. That said, more and more lenders are introducing 95% mortgages in an effort to encourage first time buyers.
I've only got a 5% deposit – what help is there?
Which one is right for you will depend on your situation and what you want to buy.
The list of options available includes:
- Help to Buy Equity Loan
- Armed Forces Help to Buy
- London Help to Buy
- Starter Homes
- Help to Buy Shared Ownership
- Social HomeBuy
- Rent to Own – Wales