How Much Money Can I Borrow for a Mortgage?
As a first-time buyer thinking of applying for a mortgage to buy a property, you’ll need to know approximately how much you’ll be able to borrow before searching for appropriate properties, and getting on the property ladder.
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What is a mortgage?
Most people who buy homes don’t have the entire value of a property to invest- this is where mortgages come in. A mortgage is a loan that allows those who don’t have the full asking price of a property in savings to get on the housing ladder.
Mortgages are a loan to cover the remaining value of a property after a homebuyer puts down a deposit payment.
The loan is secured against the property, meaning that your home is at risk should you fail to meet your repayments.
Visit our guide for everything you need to know about mortgages before you apply, or read on for more information on how much you can borrow.
How much can I borrow for a mortgage?
The amount you can borrow for a mortgage depends on a number of factors. Since the financial crash in 2008, many new regulations were introduced to ensure responsible lending was adhered to. Whilst you can still potentially borrow four or five times your salary, it will be much more stringently assessed against four main factors:
- Your income – and the other applicant’s if you apply for a joint mortgage
- Your credit score – which shows how likely you are to repay debts
- Affordability – an area the lender will pay a lot of focus on.
- Deposit – the more you put down on a property the more mortgage lenders will be willing to lend you
How do mortgage calculators work?
With our simple mortgage calculators you can get an approximation of how much you’d be able to borrow with a mortgage. Just enter your income and your partner’s or other applicant’s, if you plan to apply for a joint mortgage.
The calculator will give you an approximation of what you might be able to borrow. But remember this information is an estimate and is based on certain assumptions, it should only be used as a guide.
As you start to progress on your property purchase journey, you will speak in more detail with possible lenders and / or brokers to get an Agreement In Principle (AIP) that will give you a more accurate figure to work with when dealing with vendors and estate agents.
How does a deposit affect the cost of a mortgage?
The higher your deposit, the less you will need to borrow as a percentage of the total property price. With lower deposit sums, lenders set higher interest rates, and other mortgage fees, such as product fees, are usually higher too because of the perceived risk on the lender’s part
A term you’ll need to be aware of when considering mortgage deals is loan to value (LTV). This is the amount you borrow against the property’s total price, after your deposit payment is deducted.
The lower the LTV of your mortgage, the less you’ll need to borrow of the total property price and the more competitive the deals may become available to you.
A higher deposit is even better -- most people pay 10% deposits -- however, to start seeing better rates from lenders, you’ll need to put down 25% or more. If you put down 40% or more, you should qualify for a lender’s best rates.
Find out how much you should put down as a deposit in our comprehensive guide.
This is because mortgage lenders operate using LTV bands. The lowest being 60%, they increase by increments of 5% and 10%; 70%, 75%, 80%, 85%, 90% and 95%.
100% mortgages are an option, but will lead to you paying much more in total in the long run. If you can delay your mortgage application by just a few years to save a minimum of a 5% deposit, you could benefit financially, because your interest rates will be lower. For tips on saving for a deposit read our guide.
Bad credit mortgages are available to those with poor credit histories. The condition for this type of mortgage is you’ll usually be expected to pay higher interest. If you have bad credit, talk to a broker about bad credit mortgages, or start to address your credit score before applying.
Incomings vs outgoings
On applying for a mortgage, lenders will take into close consideration all your earnings, including your annual salary, bonuses, pensions, investments and any other income – potentially from a second job.
They will contrast your income with your monthly outgoings, to see how much of your earnings you regularly spend. This will help them identify whether you will be able to keep up with monthly repayments.
You’ll need to declare your rent and household bills, including utilities, as well as your weekly food shop spend. You’ll also be evaluated on how much you spend for leisure, which could include subscriptions to streaming services, phone bills, gym contracts and how often you eat out.
Lenders examine your bank statements for a minimum of the three months before you apply for a mortgage. If, for instance, you spend all your money before pay day or you are in your overdraft regularly, they will be likely to make the judgement that you don’t manage your money well.
Before applying for a mortgage it’s worth living well within your means for a few months; perhaps reduce the amount you spend on luxuries and make sure you maintain a healthy bank balance every month.
Mortgage lenders will carry out a credit check on you when putting together an agreement in principle, which is a non-binding agreement that they will be willing to lend money to you under the relevant criteria of a mortgage deal.
Make sure your credit score is healthy before applying for a mortgage. The more credit checks on your file, the more desperate you’ll look for finance. A poor credit rating means you could be denied a mortgage or be offered less favourable deals.
The more mortgages you apply for, the more credit checks there will be on your file, so make sure you’re in the best possible financial situation before you apply. A good rule of thumb is to only apply for credit once per three month period.
Should I take the maximum mortgage amount I’m offered?
When buying a home, knowing how much you can borrow is important, but knowing how much you can afford to spend is critical.
It is advisable that your mortgage repayments should take up no more than 50% of your salary at maximum, because in spending more you will limit the disposable income available to you. This would mean you have become ‘house poor’.
If you can keep your monthly repayments closer to 30% of your salary you’ll have more wiggle room.
Having this wiggle room will protect you should interest rates rise. During a lender’s financial assessment they will stress test your finances, which means they’ll check not only if you can afford to make your mortgage payments at the current rate, but also if it rises by 4 -6%.
By not borrowing the maximum amount you can afford, you’ll allow yourself even more of a financial cushion.
Compare mortgage deals
Use our simple mortgage calculator to get an understanding of how much you might be able to borrow. Once you have done so, you can compare mortgage deals using our comparison tables.
With our comparison table you can contrast the different deals available in the mortgage market. We list each mortgage product’s initial rate, APRC, product fee and monthly repayment, which will allow you to work out which deal will be best for you.
John Ellmore is a director of NerdWallet UK and is a company spokesperson for consumer finance issues. John is committed to providing clear, accurate and transparent financial information. Read more