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.
Understanding How Much Mortgage You Can Borrow, Research is Key:
When it comes to understanding how much mortgage you could borrow, lenders carefully assess your income and expenses. The borrowing amount can vary significantly between different lenders. While online calculators or bank consultations are options, they may be time-consuming and yield inaccurate results, potentially costing you in the long run.
When it comes to such a crucial decision like buying a home, it's vital to conduct your own research. A Mortgage Broker can simplify this process by having access to numerous lenders, helping you find the answer to "how much mortgage could I borrow" more effectively.
Employed?
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.
Second Jobs?
Although this income can be used lenders generally like to see that you have had your second job for a minimum of six months.
Self Employed?
Lenders classify individuals as self-employed if they are sole traders, in a partnership, or directors of their own limited companies. It is important to note that most lenders prefer a minimum of two years of business ownership. However, there are lenders who may assist with just one year of business ownership.
When it comes to determining the maximum mortgage amount you can borrow, it depends on your employment status and income. For sole traders, lenders typically assess the average of the last two years' net profit for the mortgage application. If you're a partner in a business, they will consider your share of the net profit. As a director of your own limited company, most lenders will take into account your annual dividends and salary, and some may also consider your share of the company's net profit.
Whether you're a sole trader or a company director, lenders usually calculate your income based on an average of the last two years. Some lenders may use your most recent year's income if it is higher, while others may only consider your first year's income if that is all you have. If your latest year's income is lower, lenders typically rely on that figure alone.
Obtaining a mortgage as a self-employed individual can be challenging, especially when aiming to borrow the maximum amount. Therefore, it is crucial to seek guidance from a mortgage broker who can assist you in navigating through various lenders and finding the one that best suits your situation. If you're wondering 'how much mortgage could I borrow', a mortgage broker can provide the necessary expertise and guidance. They can help you navigate through various lenders to find one that best suits your situation.
Check out our Guide To Mortgages For Self Employed for a helpful rundown.
Contractors:
Determining 'how much mortgage you can borrow' varies among lenders, especially for contract workers. Each lender has unique methods to calculate this, irrespective of whether you're on a fixed-term contract, zero-hours contract, operating under a day rate contract, or working as a CIS contractor. Lenders are increasingly inclined to assist contract workers, but certain conditions will apply:
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.
Other Income:
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.
Income Multiples:
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.
Ongoing Commitments:
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.
Mortgage Term:
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)
Examples:
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.
Published by Beechwood Mortgages Ref: 219335 with review and approval from Stonebridge Mortgage Solutions Limited who is authorised and regulated by the Financial Conduct Authority Ref: 454811.