How much can I borrow on a mortgage?

Last Modified 16th of February 2021

If you’re first time buyer, looking to upgrade your current property or you’re thinking of investing in a buy-to-let opportunity, getting your mortgage calculations correct is a fundamental first step in the process.

Once you’ve saved up a deposit or you’ve worked out how much profit you will make from your current property, your mortgage calculations will determine the maximum budget for the house or apartment you are planning to buy.

When it comes to working out how much to borrow, the key factor is based on who you are buying with and how much you/they earn. If you’re purchasing a property by yourself, any mortgages will be calculated based on your personal income. If you decide to enter into a property purchase with a spouse, family member or friend, the calculation will be made taking both or all of your incomes into consideration.

Ultimately, the decision of how much you can borrow is determined by your mortgage provider. Each lender has their own system to calculate the maximum property loan available to their customers, however this is still based on your annual income.

How your mortgage application is assessed

If you are in full time employment, your income will be based on your basic annual salary plus any overtime, commission or bonuses you earn. If you have a second job or additional income stream, this will also be taken into consideration. Some lenders may consider any form of tax credits or maintenance income you receive.

For self-employed people, lenders will use your accounts from the previous two years to establish an approximate level of income. Should you have less than two years worth of financial data, they may choose to offer you a self certification mortgage – this is where you state how much you earn without backing it up with financial accounts, before signing an agreement with the lender that you will meet the monthly repayments associated with borrowing this amount. Please note that self certification mortgages often have a more expensive interest rate because of the higher lending risk involved.

Income multiplier

Once it has your financial details, the mortgage provider will calculate the total loan available using its in-house system, which will be based on either an income multiplier or affordability calculator.

An income multiplier does what is says on the tin: it will times your annual income by the multiple it is willing to lend to create an overall figure. This varies between banks, however the standard offer is three times your income for a mortgage based on a single salary and 2.5 times your income for a joint salary mortgage. From there, though, it may reduce the total if you have any outstanding debts or significant outgoing financial commitments on your record.

An affordability calculator works in much the same way to an income multiplier, however they will balance your income against your outgoings to work out your actual monthly salary before multiplying it by the amount they are willing to lend. This means your loan is based on your ‘real term’ finances rather than your basic annual income.

Another factor taken into account in both types of calculation is what percentage of the total property value you are looking to borrow. Generally speaking you will be offered the amount you require more readily and at a better rate if you have a larger deposit. This is because the risk of your purchase falling into negative equity – where you owe the bank more money than the house or flat is worth – is lower.

In the past…

The 2008 recession caused major problems for the property market because, prior to the economic downturn – many lenders were happy to offer mortgages for 100% of the value of the property being purchased. Some mortgage providers even offered 105%. When global financial woes caused property prices to plummet, thousands of homeowners were left in a situation where they could not move house because they owed too much money on their mortgage in comparison to the market value of their house. As a result, nowadays you are unlikely to be offered a mortgage for more than 85-90% of the value of your property, making it evermore important to save up an initial deposit.

With each bank or building society offering its own mortgage deal based on differing terms, it might be helpful to consult an Independent Financial Advisor initially to get an overview on the sort of amount that will be available to you and the best type of mortgage for your financial situation. Unbiased is a good tool for finding financial advisors in your area.