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How much mortgage can you borrow?

How much mortgage can you borrow?

Category: Mortgages

How much mortgage you can borrow depends on these four things:

  1. The amount you want to borrow in relation to the property's value (also know as LTV, or loan-to-value)
  2. Your credit score
  3. Your income
  4. Your outgoings

But really the question should be: "How much mortgage can you afford?" Although the lender (and mortgage broker if you use one) is responsible for checking whether you can afford the mortgage payments, make sure you can easily manage the repayments you are taking on as well.

You should be able to comfortably afford the mortgage when you take it out so that unforeseen events (such as interest rate rises, or redundancy) don't put your home in jeopardy later on.

Sometimes your feelings on how much you can afford can be at odds with a lender's. So make sure you know what a lender looks for to avoid the frustration of not getting the mortgage you need.

The value of a mortgage broker

Forgive this aside but at this point it's worth mentioning that value of an independent mortgage broker. Beacuse brokers work closely with a number of different lenders, they know the ins and outs of the different lending criteria each mortgage provider has. This has a distinct advantage over doing it yourself as it can save you time, as well as money if a mortgage lender later declines to give you the mortgage you want.

1. How loan-to-value affects how much mortgage you can have

Loan-to-value, or LTV, means how much mortgage you have in relation to the value of your property. So if you have a £50,000 deposit for a £200,000 property, the mortgage you need would be £150,000 – or 75% loan-to-value.

Mortgage lenders will specify an upper LTV limit for each of their mortgage products. This does not mean that you will necessarily be able to borrow this amount – that will depend on your credit score, your income and your outgoings.

For more information about LTV read our Loan-to-value guide.

2. How your credit score affects how much mortgage you can have

Your credit score has a big part to play in how much you can borrow. In the most extreme cases a low credit score could prevent a mortgage lender even considering you, or, more likely, a low score could mean that the lender uses a lower multiple of your income to decide how much you can borrow.

3. How income affects how much mortgage you can have

Income is crucial to determining how much mortgage you can have. Traditionally mortgage lenders have applied a multiple to your income to decide how much you can borrow. So if you earn £30,000 per year and the lender will lend 4 times this, they may be able to lend £120,000.

But many households have two incomes, so some lenders offer a choice:

  • The option to add the second income on top of the multiple, so if the main breadwinner earns £30,000 and the second person's income is £15,000 a lender might offer 4x the first income, plus the second income (4 x £30,000 + £15,000 = £135,000)

or

  • A slightly lower multiple for two incomes than for one. So £30,000 + £15,000 = £45,000. Then £45,000 x 3 = £135,000)

These income multiples may be reduced if you have outstanding personal debt, such as a loan or credit card, when you apply for the mortgage and if you have a low credit score.

The lender will normally use the income multiple that is the highest to determine the amount they will lend to you (although this will be subject to LTV and your outgoings).

If part of your income is comprised of a bonus or overtime, you may not be able to use this (or, if you can, you may only be able to use 50% of the money towards what the lender deems as your income).

All income you declare in your mortgage application will need to be provable – usually through you providing your latest pay slips, pensions and benefits statements.

However, increasingly lenders have also been using more complex ways to determine how much of a mortgage you can borrow. They now take into account your monthly outgoings to see whether you can afford the mortgage too.

4. How outgoings affect how much mortgage you can have

Your regular household expenses, debts and insurances can all affect what a mortgage lender will let you borrow. Outgoings that a lender may take into consideration include:

Some lenders also apply a reduction to the amount you can borrow for the number of children you have (assuming an average monthly expense).

Guide updated: 26/02/14

What next?

Mortgage Calculator - How much an you really borrow?
Find the best deal for you with moneyfacts whole of market mortgage service
Compare buy-to-let mortgages

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

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