Buying a home is one of life’s major financial commitments, so working out exactly how much you can afford to borrow is really important.
Here, we explain how lenders decide how much you can borrow and which factors they take into account.
Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage. If you’re looking for expert mortgage advice, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice.
How much will you be able to borrow?
As a general rule of thumb, mortgage lenders will usually allow you to borrow between three and five times your annual salary. For example, if you earned £26,000 a year, you might be able to borrow anything between £78,000 and £130,000, depending on your circumstances. That’s if the mortgage is in your name only. If you’re buying with someone else, you’ll typically be able to borrow up to three or four times your joint income. Bear in mind, though, that the amount you can borrow depends on a detailed look at your income and expenditure before a lender makes a clear assessment of how much they will lend.
Lenders will also factor in how much you want to borrow in relation to the value of the property when making their assessment of how much they are willing to lend. This is known as the ‘loan-to-value’ (LTV) and is expressed as a percentage. For example, if you want to borrow £150,000 against a property valued at £300,000, this amounts to an LTV of 50%.
They also used to look at your mortgage affordability, to check that you can afford your mortgage costs now, but also if rates rise in future. The ‘stress’ interest rate they used was typically three percentage points higher than the ‘reversion rate’, usually the lender’s standard variable rate, that borrowers revert to when their mortgage deal finishes.
However, this affordability test was removed from August 1, 2022, in theory making it easier for buyers to get a mortgage, as they no longer have to prove they can afford steeper rates in future. The loan to income limit, however, remains in place. Find out more about this in our article Mortgage affordability rules scrapped: what does it mean for you?
How do lenders work out how much you can borrow for a mortgage?
To work out how much you can afford to borrow, lenders will carry out a thorough mortgage affordability assessment of your finances, taking a detailed look at both your income and your outgoings. For example, they may want to look at your:
- Utility bills
- Insurance policies
- Debts, including credit cards, personal loans and car finance payments
- School fees
- Gym memberships
- Car costs
- Weekly shopping bill
- Childcare costs
- Pension contributions and savings
The aim of the lender’s assessment is to understand how much you can comfortably afford to pay back each month. If you are consistently spending more than you are earning, some lenders may refuse to offer you a mortgage. However, you may still be able to get a mortgage, but it is unlikely to be one of the best deals.
Lenders will usually ask you to provide financial information for the last three months, usually in the form of bank statements. Therefore, if you know you’re going to be applying for a mortgage, it’s sensible to monitor your spending and keep this in check for at least three months beforehand to improve your chances of being accepted for a mortgage.
How to work out what you can afford
The easiest way to see how much you might be able to afford to borrow is by using an online affordability calculator. An online search will give you a huge number of options, but if you are looking for a place to start, we have a mortgage affordability calculator, which will give you a rough estimate of what you might be able to afford, based on current market conditions.
Once you have a rough estimate, it can be helpful to compare different mortgage options to understand what your monthly repayments are likely to be. You can simply enter a few basic details on our mortgage comparison tool, and we’ll compare mortgage deals across the whole of the market. From this, you can decide which deal might be most suitable for you.
If you think you’ve found the right deal for you, you can apply for an Agreement in Principle (AIP) which details how much you could borrow before you apply for a mortgage. To get an AIP, you will have to provide the lender with some basic financial information so they can run a credit check. Some estate agents ask for an AIP before showing you available properties, and it’s generally a good idea to get one to demonstrate that you are a serious buyer. However, it’s important to remember that the AIP isn’t a binding agreement, so when you come to apply for a mortgage, you may receive a different offer.
How to get the best mortgage deals
The amount you can put down as a deposit will have a major impact on your borrowing potential. Essentially, the bigger your deposit, the better the mortgage deal you are likely to receive.
While it is possible to get a mortgage with just a 5% deposit, the best rates are usually reserved for people with deposits of 25% or more of the property’s value, so the more you can save, the lower your mortgage repayments are likely to be.
You can find out more about all the different mortgage options that may be available to you, and how they compare, in our articles Mortgages for over 50s: What you need to know and Mortgages for over 60s: what you need to know.
You can find out more about all the different mortgage options that may be available to you, and how they compare, in our articles Mortgages for over 50s: What you need to know and Mortgages for over 60s: what you need to know.
There are of course a number of other fees that you will have to pay when buying a property, such as stamp duty, legal, and any mortgage arrangement fees, so it’s really important to make sure you can afford these before putting all your savings down as a deposit. You can see what other costs you might need to think about in our article How much does it cost to move house?
Get mortgage advice
If you are thinking of getting a mortgage, it’s often sensible to speak to a mortgage broker to help you understand your options, and which deals may be most suitable for you. In fact, some lenders have exclusive deals that are only available through mortgage brokers.
One major advantage of using a mortgage broker is that they can help you navigate different lenders’ acceptance criteria. This is particularly useful given how quickly the mortgage market changes, and if you have any unusual circumstances around your income or property.
If you’re looking for expert mortgage advice, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice.
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