Thinking of applying for a mortgage and wondering how much you can borrow? Find out what the income multiples could be if you are buying on your own or with a partner.
The property market in the UK is currently booming, and house prices are rising. If you’re a potential first-time buyer about to start searching for a suitable home, you may be wondering how much you can borrow. No doubt you’ll be wanting to get things moving swiftly before prices increase too much.
To find out how much you can borrow, you may be tempted to use an online mortgage calculator. However, a mortgage calculator only performs a basic assessment and won’t usually take all your expenses into account. It’s OK to use one as a rough guide but don’t take it too seriously.
Online mortgage calculators are not to be confused with lenders’ own affordability calculators, which they will use themselves to assess what they are prepared to lend.
When it comes to borrowing, lenders will look at your income versus your outgoings to see how much you can afford. Most mortgage loans now are fixed-rate deals, which means you will pay the same amount each month. However, the fixed term is temporary, typically lasting between two to five years. Lenders will want to know whether you can keep up with the repayments when your fixed term ends, as they will place you on their standard variable rate – usually higher than your fixed-rate deal.
Loan-to-income ratio explained
How much you can borrow is known as the loan-to-income ratio. Most lenders will typically cap your loan-to-income ratio at four and a half times your income if you are a sole applicant. For example, if you are applying for a mortgage on your own and you earn £40,000, you will be able to borrow a maximum of £180,000.
If you are buying a property with a partner, you’ll usually be able to borrow more on a joint mortgage. Lenders will typically use the same income multiple of around four and a half times your joint income. So for instance, if you earn £30,000 and your partner earns £30,000, you would have a combined income of £60,000 and would be able to borrow approximately £270,000. However, it’s important to understand that lenders are different. ‘Some lenders will apply a higher loan-to-income cap, and some will be more conservative than four and a half times,’ says MB Associates’ Sales Manager Phil Leivesley. ‘It’s just a very simplistic rule of thumb.’
Joint mortgage application
What if you want to buy a place with more than one person? You can take out a joint mortgage with up to four people – for example, your partner plus friends or other family members. However, lenders will usually only take the two highest incomes into consideration when deciding how much to lend.
In addition to your salary, lenders will factor in regular overtime, any bonuses and any commission you may have earned. Most lenders will take around 50 per cent of your additional earnings into consideration on top of your salary.
Good career prospects
There may be some occasions where you can borrow more than four and a half times your income. Some lenders may lend up to five and a half times your salary if your profession offers good career prospects (therefore presenting them with less risk). These professions include doctors, dentists, accountants, barristers, optometrists, pharmacists, solicitors and vets.
When deciding how much you can borrow, lenders will factor in your monthly outgoings, including any loans or credit card bills you are paying off, and how much you spend on holidays and recreational activities. They will also want to carry out credit checks. This means that the loan-to-income cap is not necessarily the be-all and end-all when it comes to what you may borrow. ‘Lenders’ own affordability calculator will override this,’ says Phil. ‘For applicants with lower incomes the loan to income cap can be a completely misrepresentative calculation, and the amount deemed to be affordable could be much lower. Also, applicants who have fairly significant outgoings, such as credit cards and loans, or who have dependents, might find that the amount deemed to be affordable is less than the cap would suggest.’
As the situation can clearly vary depending on personal circumstances, it’s important to seek expert advice from a mortgage broker who can look at your situation carefully and then advise you.
Before you apply for a mortgage, it’s important to think about how you would meet the monthly payments if you or your partner lost your job, or you couldn’t work due to illness. An income protection policy would typically cover up to 65 per cent of your income if you couldn’t work due to accident or illness, paying out a regular monthly sum. Critical illness cover would pay out a lump sum in one go if you were diagnosed with a serious illness and couldn’t work.
To be safe, it’s wise to have a contingency fund for any unexpected costs such as car repairs or vet bills. It would be ideal if you could have three months’ worth of expenses saved up to cover your mortgage and bills in the event of the unexpected occurring.