How much can I borrow on a mortgage?
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How much can I borrow on a mortgage?
Richard Campo answers some frequently asked questions on mortgage borrowing. Podcast recorded in September 2023.
The content contained within was correct at the time of publication but is subject to change 20/09/2023.
How do lenders calculate how much I can borrow on a mortgage?
It’s all about one word – affordability. Affordability is a mix of your income and your outgoings. It’s not one or the other. There are really complicated factors around your age, outgoings, whether you have children, if you have debts, and we’ll get through all those in more detail.
There’s no straight answer on how banks calculate how much you can borrow, but pretty much every bank in the land will offer you four and a half times your income, less outgoings. Some will go as high as six times, particularly if you’re a higher earner. If you’re a high net worth individual, with an income over £300,000, then the usual rules don’t apply.
That’s a very broad brush answer, just to give you the basics, and we’ll get into the detail as we go.
What factors do lenders consider when assessing my borrowing capacity?
The biggest thing is your net income. I don’t just mean what you take home each month if you’re employed, or your net profit if you’re self-employed. Net income is what’s left when you strip out things like childcare and other debts. That’s the starting point.
The second biggest one will be your age. As a rule, the older you are, the less you can borrow – simply because you have less time to pay it back. That’s not always the case, though, banks do make exceptions.
The third part to this is the sustainability of the income. Let’s say, for example, you run a limited company selling PPE and made huge profits in the last few years. Banks aren’t going to look on that favourably going forward.
So it isn’t just about your income now, it’s the sustainability of that. That’s really relevant when you’re using things like commission, bonuses and profit. Banks can get right down to what sector you work in, and what your occupation is. There’s a lot more detail around this than there used to be.
What is the maximum Loan to Value ratio I can get on a mortgage?
It varies depending on the market. For example, if you go back to the depths of 2008 and 2009, very few lenders lent above 75% of the property’s value. But in the lead up to the credit crunch they were offering 120% or 130% Loan to Value.
As a general rule today, most banks go to around 95% to 100% of the property price. The higher you go, the more caveats there are. You can borrow up to 100% – those products have always been around, but how complicated they are depends on where the market is at that moment.
Are there any specific income requirements or limits for mortgage borrowing?
I think this is a good way to express how affordability works. I started in banking in 1999 and my boss at the time said that a loaf of bread always costs what a loaf of bread costs. Whether you earn £100,000 a year or £10,000 a year, you’ll spend the same on a loaf of bread.
The point is, the higher your income the more you can afford – not just in multiples of your salary but in the gross amount. That’s a bit more formalised these days, in that if you earn over £75,000 banks are more generous. You might be able to borrow five and a half times your net income.
There’s the high net worth exemption as well. The magic number in mortgages is to earn over £75,000 because those baseline costs are simply less of a proportion of your income.
How does my credit score affect how much I can borrow on a mortgage?
It has a big impact. There’s no two ways about it. If you are in a position where you’ve had credit issues in the past there’s a sliding scale. The longer ago the issues were, and the smaller they were, the less impact it has. Everything falls off your credit file after six years and banks don’t look back beyond that point.
If you have had big issues recently, some banks are quite conservative – you might only get four times your income. But most do their affordability assessments and will get you around about four and a half to 5 times your income.
Weirdly, specialist lenders can be more generous because there’s so much underwriting and risk that goes around it. Some banks can actually lend you more if you’ve got credit issues in the past – it does seem a bit counterintuitive, but that’s the way it is.
Can I include my partner’s income when calculating how much I can borrow?
Yes. There used to be funny rules around this when I started in banking – it was four and a half times the sole income but three times a joint income. I’ve never understood why that was, but it’s gone now. That’s an ancient thing.
So everything I’ve just said applies. You just put your incomes together and the affordability is based on that joint total. One thing to make clear is that if you are married, most lenders insist that you’re both on the mortgage.
A few years ago Santander had an issue in court where they couldn’t repossess a home because the partner wasn’t named on the mortgage but paid it. So fewer lenders now will let you buy on your own if you’re married.
Are there any specific rules or restrictions on borrowing for self-employed individuals?
It varies. We’re in a tricky period now, coming out of Covid, the mini budget and the cost of living crisis – so the market is a bit tighter. Sadly, that means there are restrictions. I’m self-employed myself and I feel this directly. Some banks will do a maximum of four and a half times your income or maximum of 75% lending on the property.
But not all banks apply those rules. Some are equally generous or even more generous – you just need to know your way around it.
Does my age affect how much I can borrow on a mortgage?
Age is a huge factor now, yet it never really used to be. The cost of living squeeze is probably one of the biggest factors. Interest rates have also risen 450% in the last nine months which isn’t to be overlooked, either.
It goes back to affordability. You can simply afford more if you borrow over 40 years than over 10 – that’s the simplest way I can put it. It’s not an ageist thing, it’s a practicality.
Can I borrow on a mortgage if I have a poor credit history?
Lenders are more generous than people think. As long as there have been no issues in the last two years, a lot of the high street lenders are comfortable.
If you’ve had more than three credit issues, especially something quite formal like a CCJ, in the last two years – especially with a total debt of more than £500 – banks need a specific licence to transact that business.
If you don’t fit into that category then it’s really down to the bank’s discretion. Some banks are even now remarkably flexible. People are quite shocked that you can get a 90% or 95% mortgage and five times your income with credit issues.
There are banks that will lend to you the day after your discharge from bankruptcy. It always depends on the situation. It’s not that absolutely everyone can get a mortgage – that isn’t the case. But if you’ve got into debt particularly because of a life event – divorce, illness, that sort of thing – most lenders are very understanding. You might actually get a far better outcome than you think.
Is there a maximum debt to income (DTI) ratio that lenders consider?
We’re getting deep into the dark arts here. Debt to income ratios are really big – but it’s not really spoken about a lot. Some banks in the background have rules where if, for example, your debts equate to 50% to 100% of your income, they will decline the application.
If you had a £100,000 income and £75,000 in unsecured debt, even if the loan was affordable, some banks would decline that because it breaks that DTI rule. Again, it varies in time and varies by lender, but it’s a very real thing and could influence the choice of bank we approach.
How does my existing debt, such as student loans or credit card debt impact how much I can borrow?
If you had no debts at all, most banks would offer you five times your income. So if you earned £100,000 you could borrow £500,000.
If you’ve got a student loan and car finance and you’re spending £1,000 a month on those debts, most banks annualise that amount – so that’s £12,000 taken off your income. Your net income then is £88,000. Then the five times multiple is applied – and that means you could only borrow £440,000.
Banks also stress test the debt in the background. With interest rates going up, you might find that instead of getting to four and a half times income, a bank will only offer you up to three times your income because of those stress tests.
If you’re consolidating debt it’s less of a factor. Some banks do include it, some don’t. It’s complicated, but there are always ways to navigate that, so talk to an advisor.
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Are there any specific affordability assessments that lenders use to determine borrowing capacity?
It’s a mix. Some banks are really comfortable with older clients, some banks are really comfortable with clients who have debt. Some banks are really comfortable with people who have credit issues….you get the idea.
No one bank does everything. They all look at this in terms of affordability and every single bank is different. That’s where the skill of the broker comes in. The good news is that if a bank says no to you, the next one down the high street might say yes.
Can I use a mortgage calculator to get an estimate of how much I can borrow?
No, you can’t, really. We’re mortgage professionals who give advice for a living and we don’t
have a single tool that does that for us. A few companies are trying at the moment but they don’t get it right.
It’s a very manual thing, for all the reasons I’ve just mentioned. The best thing is to speak to an advisor. We can do the research, get you an Agreement in Principle – and that’s a real rubber stamp on what you can borrow. That’s really the only way you can do it. If there was a clever, easy way, I wouldn’t have a job.
What documentation do I need to prove my income and expenses for mortgage borrowing?
There are two main things we need – the first is bank statements, because that shows things like debts, loans, credit cards etc. A credit file is fine but it won’t show nursery fees, maintenance payments, or school fees. That’s why every bank generally wants to see bank statements. We can do that assessment on behalf of the bank and explain why certain things are or aren’t continuing.
The second part is proving your income. If you’re employed, it’s straightforward, it’s your payslips and P60. If you are self-employed it’ll probably be your accounts and your SA302s.
Different banks treat self-employed income differently. You can go to two different banks and get wildly different outcomes in terms of what you can borrow. So again, let us do the assessment and we’ll figure out the best path forward.
What steps can I take to increase how much I can borrow on a mortgage?
If you can, pay off your debts in full each month and make all your payments on time. They’re the things you can really control. I could say get a well-paid job – but if it was that easy, everyone would do it.
So within things you control, it’s how much you earn and how you conduct your affairs. The squeakier clean you are, the better the outcome is generally going to be for you.
Are there any government schemes or support available that could help me borrow more on a mortgage?
Not really. A few complicated things happen in the background, where the government via the Bank of England guarantees loans – and that’s why 95% lending came back.
I won’t get into politics and my views on the current administration in September 2023, but it’s fair to say they haven’t been very proactive at assisting people in the mortgage market.
How can fluctuations in interest rates impact how much I can borrow on a mortgage?
This is probably the biggest hot topic in our industry right now. In 2014 there was a piece of regulation called the RDR, the Retail Distribution Review. As part of that, stress tests were introduced because the Bank of England base rate back then was under 1%.
The base rate is currently 5.25% as we speak in September and may well get higher. Banks previously stress tested whether you can still afford a mortgage at 5, 6 or 7%.
Banks are then stress testing again at higher levels, and that’s why people can borrow less than they could have done six or nine months ago – quite a marked decrease. Because if you take a new loan and rates go up, it shouldn’t affect your outgoings. That’s the point. And that’s why arrears and repossessions are so low in the UK. We’ve been stress testing for a long time.
The press make clickbait headlines around mortgage rates going up and repossessions, but we’re not seeing it and I don’t think we will. It will happen in some situations, but not to the degree the media suggest because of the way things are underwritten. So while lending is a bit more conservative, it does actually safeguard everyone. It’s in everyone’s interest in the long term.
Can I borrow more than the asking price of a property to cover additional costs?
Not currently. A few banks offer 100% of the purchase price but you still need to cover stamp duty, legals etc. I’d be surprised if that comes back – but then I’m constantly surprised these days. I do think it’s unlikely.
Normally 100% is the maximum you can get to. As a rule, the bigger deposit you can put down, the better the rate you can get. It’s always in your interest to put down a deposit.
Are there any specific rules or limits on borrowing for Buy to Let mortgages?
If you’re looking at Buy to Let we have a great podcast on our website. Listen to that, because everything I’ve spoken about here is purely around residential lending. This doesn’t affect Buy to Let.
On Buy to Let there’s such a complex answer I don’t want to even attempt it here. But that podcast will answer all the questions you have.
How can I improve my chances of getting approved for a higher mortgage amount?
The big things are age, income and outgoings. You can’t get any younger – as I’m learning: I did a half marathon at the weekend and can barely get up the stairs now. You can’t control age.
Income is a sensitive subject for some and control can be challenging on that. With outgoings, pay them off, save up – it’s old fashioned financial advice, but they are the main things you can do.
Your home may be repossessed if you do not keep up with your mortgage repayments.
The content contained within was correct at the time of publication but is subject to change 20/09/2023.