Updated: 7 days ago
For many, purchasing a property can be quite a daunting prospect, particularly if you require a mortgage to do so. You can help minimise your stress by engaging with the right professionals as early into the process as possible, who can quickly provide you with an accurate idea of how much you can spend on a property. If you require a mortgage from a bank or building society, firstly understanding how much you can borrow is a great place to start. In this article we focus specifically on how lenders approach things when determining how much they will lend you.
Research is Key
When it comes to getting a mortgage, lenders will carefully review your income and expenses. The amount you can borrow can vary significantly between different lenders. While you can use online calculators or speak to various banks, this takes time and some calculators may not give accurate results, which could be expensive in the long term.
When it comes to something as crucial as buying a home, it's essential to do your own research. A Mortgage Broker can make this process much easier since they have access to numerous lenders at their fingertips.
When applying for a loan, lenders primarily look at your annual basic salary before tax. If you have recently started a new job, some lenders may still consider your application, although some require a minimum of 3 months in your current position.
Regarding any additional income you receive such as bonuses, overtime, or commission, lenders typically examine your last 3 months' payslips. They will calculate an average from this timeframe, annualise it, and add it to your basic salary.
Although this income can be used lenders generally like to see that you have had your second job for a minimum of six months.
Lenders will view you as self-employed if you are either a sole trader, in a partnership or a director of your own limited company. Before you consider what income will be used you need to know that, certainly for the majority of lenders, they like to see that you have owned your business for at least two years. Not all is lost though, a few lenders may be able to help if you have only owned your business for one year.
When determining how much you can borrow, if you are a sole trader lenders will typically average your last two years ‘Net Profit’ and use that figure towards your mortgage application. (for partnerships they will look at your ‘share of net profit’)
If, however, you are a director of your own limited company, whilst most lenders will use your annual dividends and salary, some can in fact take your share of company net profit along with your salary – this could be more favourable if you have retained profits in your business.
Whether you are a sole trader or a director of your own company most lenders will average your last two years income. However, one or two can consider using your latest years income if it’s higher. (with a few using just your first year if that’s all you have) Equally, if your latest years income is lower lenders will typically use that figure in isolation.
One thing is for sure, if you are self-employed, applying for a mortgage can often prove challenging, particularly if you are trying to maximise your borrowing potential. It’s therefore vital to seek advice from a mortgage broker as they will be able to consider the majority of lenders and therefore source one that can in fact support you. Check out our Guide To Mortgages For Self Employed for a helpful rundown.
Lenders are becoming more geared up towards helping contract workers. Whether you are on a fixed term contract, zero hours, operating under a day rate contract or working as a CIS contractor, lenders are keen to help where they can. As a very basic guide, some conditions will apply for each and that could look as follows:
Fixed Term – you will need to have been operating as such for a minimum of 12 months and ideally with 12 months remaining on your current contract.
Zero Hours – most lenders will expect to see 12 months pay slips and use that income for mortgage purposes.
Day Rate – regardless of whether you are operating beneath an ‘umbrella company’ some lenders will still treat you as self employed (see below) and therefore not offer you as much as one that will use your day rate. Finding a lender that can consider your day rate will certainly maximise your borrowing capacity, often using a formula such as your day rate x 5 x 46.
CIS – 12 months history as a CIS contractor is the norm, although one or two can consider just 6 months.
The above is simply a basic guide as contractor policy will always vary from one lender to the next, with some lenders offering a more relaxed approach to contract workers than others.
Lenders can consider using other fixed income – this could be state benefits, child benefit, maintenance, state and private pension payments, profit from rental properties to name but a few.
Whether you are employed or self-employed, lenders typically lend a multiple of your total income. This could be as low as twice your annual income to as much as 5 to 5.5 times your annual salary. There is such a variation as the amount offered will be influenced by your actual income level and your outgoings as well as the selected term of your mortgage.
From time to time there are schemes that enable you to borrow more than noted here but do consider your own situation and ongoing affordability as to not overstretch yourself.
A large part of determining your borrowing capacity will be looking at your fixed outgoings. With this in mind, lenders will always factor in any monthly commitments – for example loans, car finance or lease payments, student loans, credit cards, child maintenance, childcare costs or school fees, payments into your pension.....the list goes on. As a general rule of thumb, if you have sizeable commitments it is unlikely that a lender will support you with their highest income multiple.
Believe it or not, your mortgage term is another factor that will influence how much you can borrow, with many lenders keen to see that your mortgage is repaid before you reach your 70th birthday. (more lenders are moving towards your 75th birthday but it's important to avoid extending your mortgage term into your retirement)
If you are between the ages of 20-35 most lenders will be comfortable offering a mortgage term of 35 years, some as long as 40 years. As such they are more likely to offer you a generous income multiple.
If, however, you are 54 and looking to a secure a mortgage which is therefore limited to 15 years or so, most lenders will offer you less due to the shorter repayment period and higher monthly repayments as a result.
In conclusion, understanding your borrowing capacity for a mortgage can be complex. To ensure you are fully equipped with the knowledge and confidence of what you can really afford, engaging with a mortgage broker is the best route to take. They will offer tailored and comprehensive advice to guide you throughout the whole process, leaving you with an achievable budget to structure your search.
If you have any questions or would like to chat further about how much you can borrow on a mortgage, our experienced team will be more than happy to help – get in touch today and let us take it from there.
Your home may be repossessed if you do not keep up repayments on your mortgage.