How much can I borrow for a mortgage? Prices explained
The cost of living crisis and the Bank of England’s decision to raise interest rates have made it crucial to understand what mortgage you can afford.
In addition to announcing the change in its base rate, the country’s central bank also announced forecasts that inflation would reach 13% in October 2022 and that a recession is underway.
So how do you know what mortgage you can afford – and how is it calculated?
Here’s what you need to know.
How are mortgages calculated?
Mortgages are calculated based on your employment status, income and expenses.
Lenders will want to assess whether you can keep up with your monthly mortgage payments.
- Your salary
- Income from pensions or investments
- Income from child support and financial support from ex-spouses
- Any other income – including overtime, commissions or bonuses from your work, as well as any other work you have.
To assess your income, lenders ask for payslips and bank statements that serve as proof of your income.
Self-employed people must also provide business accounts, income tax details and tax returns going back up to three years.
- Credit Card Refunds
- Insurance – such as building, contents or travel
- Any other loan or credit agreement you have
- Utility bills
The lender may also ask you to estimate other living expenses, such as how much you spend on clothing or hobbies.
They’re also very likely to take your credit score into account, so it’s worth making sure you’ve checked it out and are happy that it accurately reflects your financial situation.
“Your multiple income, additional income, and expenses will all impact a lender’s decision on how much they will offer you as a mortgage,” says Almas Uddin, founder of mortgage brokerage Revolution. brokers.
“Using this information, they will do an affordability assessment, but they will also do a stress test of your repayment capacity.
“This determines whether or not you will be able to meet your mortgage payments in cases where the monthly cost increases, or if there is a change in your income, for example if you lose your job, change profession or have a child.”
The way mortgages are calculated changed this month.
This mechanism was an analysis of a potential borrower’s ability to repay their mortgage in the event of a major change in their income or expenses, such as the birth of a child.
Instead, they just have to comply with the Loan-Income Limit (LTI).
This limit caps the number of home loans that can be granted to borrowers whose LTI ratios are equal to or greater than 4.5.
It is designed to prevent lenders from collapsing if too many borrowers cannot repay their loans – a problem that was a feature of the financial crash of 2008.
The Bank of England said scrapping the test would retain an “appropriate level of resilience in the UK financial system” while making mortgage rules “simpler, more predictable and more proportionate”.
However, Gemma Harle, MD at Quilter Financial Planning, said at the time that the change could make it harder for first-time buyers to get on the real estate ladder, as it would fuel house prices.
How much can I borrow for a mortgage?
According to Revolution Brokers, you’ll usually be able to get a mortgage worth between four and six times your annual income.
So if you and your partner earn a combined total of £50,000 a year, you’ll probably be able to get a mortgage of at least £200,000.
However, if you have substantial savings that can be used as a deposit, or can use a government program like Help to Buy, this rule may not apply to you.
Also, if you’re able to extend your mortgage for a longer period, it can make it easier to borrow – although you’ll end up paying more overall due to interest payments on top of your loan.
The government has said it is considering introducing very long-term mortgages to open up the housing market to more people.
What is a Mortgage Calculator?
Short of going through a mortgage brokerage process, one way to roughly determine how much mortgage you could afford is to head to a mortgage calculator.
But not all comparison sites will give you the same results, so it’s worth getting some estimates to understand what range you’re looking at.
How can I increase the mortgage I can borrow?
According to industry expert Almas Uddin, there are several ways to maximize the mortgage amount you can borrow.
Find a good mortgage broker
“A good broker will help you get the most competitive rates and prices, while suggesting the best possible mortgage products based on your personal situation,” he says.
“Ideally, you want to go with a global broker because they have access to all the products in the market at any given time.
“Too often buyers go straight to their bank because they’re familiar, but doing so can seriously limit their options.
“As a broker also deals in volume, lenders will often offer them better rates and so a good broker is certainly able to determine the quality of mortgage you can get.”
Do a financial spring cleaning
“Clear your debts, close any accounts that are in excess of your credit footprint streamlining requirements, do what you can to improve your credit rating, and if you’re in line for a raise, wait until that you apply,” Uddin said recommends.
“You can also use a budget planner to control costs and save regularly to demonstrate signs of financial responsibility.”
Avoid big life changes when applying for a mortgage
“Changing jobs or becoming self-employed before applying, investing in a major purchase like a new car, and co-signing a loan for someone else could impact your mortgage affordability – especially in the current climate,” says Almas Uddin.
“Multiple new searches on your credit report can also be detrimental, such as new credit cards or new bank accounts.
“Borrowing too much, having existing debts, and even major lifestyle changes, like having children, can also work against you.
“It probably goes without saying, but any recent defaults or county court judgments are also a big red flag.”