Are you looking to purchase a home? If so, understanding how much you can borrow on your salary – or income - is essential. Knowing this information will help you determine which properties are within your budget and make sure that the mortgage payments don’t stretch your finances too thin.
In this article, we’ll discuss mortgage affordability criteria and provide information on calculating how much money lenders may be willing to lend based on your income. Read on to learn more about finding the right mortgage for you.
In this Guide, We Cover the Following Topics:
- How Much Can I Borrow on My Salary?
- How Much Can You Borrow with a Joint Salary?
- What Types of Income Determine the Maximum Amount I Can Borrow?
- How Are Self-Employed Earnings Assessed When Applying for a Mortgage Application?
- How Do I Prove My Income When Applying for a Mortgage?
- What Other Factors Are Taken into Account When Assessing Affordability?
- How Can I Increase My Mortgage Borrowing Power?
- Summing Up
How Much Can I Borrow on My Salary?
When it comes to determining how much you can borrow for a mortgage, most lenders will be willing to offer up to 4 to 4.5 times your annual income as long as their affordability criteria are met. There are some cases in which 5x and 6x incomes may also be attainable, but this will depend on your circumstances.
Here are a few examples of maximum borrowing based on salary (based on 4x to 6x your salary):
- An annual income of £20,000 = mortgage loan of between £80,000 and £120,000
- An annual income of £30,000 = mortgage loan of between £120,000 and £180,000
- An annual income of £40,000 = mortgage loan of between £160,000 and £240,000
- An annual income of £50,000 = mortgage loan of between £200,000 and £300,000
If you'd like to give yourself a better idea of the amount that your income allows, don't forget to try our helpful mortgage calculator. It will help you to get a better understanding of what kind of loan you can get based on your current salary.
How Much Can You Borrow with a Joint Salary?
If you're applying for a mortgage with someone else, such as your partner or spouse, the 2 incomes can be combined in order to increase how much you're eligible to borrow from lenders. Generally, most lenders will take both salaries into account and then add them together before applying the affordability multiplier. This means that if 2 people earning £25K each apply for a mortgage, most lenders will use £50K as their basis for the maximum loan level.
It's important to note that both applicants must pass the relevant credit checks and prove their incomes via appropriate documents. If one of the candidates has a high salary but a record of making late payments or has bad debts, this could adversely affect the application. Additionally, lenders also take into account any other financial obligations such as child maintenance payments or existing loans.
What Types of Income Determine the Maximum Amount I Can Borrow?
When evaluating your borrowing capacity, lenders take into account more than just your basic wage. If you earn bonuses or commissions, work overtime, or receive benefits or some type of allowance then lenders may be able to consider some or all of these income avenues when calculating what you can borrow.
Different lenders have different criteria and approaches when it comes to considering income and affordability for a mortgage. For example, some may consider 100% of commission-based earnings on an annual basis, while others only include 75% or 50%. It's important to look for the lender that best aligns with your specific situation. At John Charcol, we have access to the whole market and can help you find the right lender for your circumstances.
How Are Self-Employed Earnings Assessed When Applying for a Mortgage Application?
If you're self-employed, lenders will often require 2 years of trading accounts to demonstrate your earnings. Some providers can offer mortgages for newly self-employed applicants who may not be able to provide such records. This is where a specialist mortgage broker can be a huge help as we can seek out lenders that are willing to consider less than 2 years of accounts.
Your earnings may also be assessed differently if you operate a business. If you're a sole trader or in partnership, lenders typically look at the average net profit from your business over the past 2 years to assess your affordability. For limited company directors, they tend to consider both salary and dividends taken and then calculate an average figure. As for contractors, most lenders will use your day rate as well as assume that you work 5 days every week throughout 47 or 48 weeks a year to calculate estimated annual income.
How Do I Prove My Income when Applying for a Mortgage?
When applying for a mortgage, you'll need to provide evidence of your income in the form of payslips, bank statements and/or accounts from the past 3 months. If you’re self-employed or receive commission as part of your salary, you’ll need to provide additional proof of income. This can include accounts from the past 2 years and/or a letter from an accountant or audited accounts confirming your earnings.
What Other Factors Are Taken into Account When Assessing Affordability?
Income isn't the only factor that determines your borrowing capacity and lenders will take several elements into consideration. These include the following.
Lenders will look at your expenses such as car finance, utility bills, loan repayments and average household expenditure to assess how much disposable income you have. This helps them determine what you can afford to repay on a monthly basis. They will also consider other major commitments, such as childcare costs or business expenses.
To increase borrowing capacity, it’s worth taking a look at current spending to see where you can cut down. Items such as unnecessary subscription services or ordering takeaways add up over time and can have a significant impact on the amount you’re able to borrow. Reducing expenses in the months leading up to your application can also free up more money that you can put towards a deposit.
Your Credit Score
Your credit score is a reflection of how reliable you’ve been in the past when it comes to making payments. Lenders specifically look at your credit history to understand how likely you are to keep up with mortgage repayments. If you have a poor credit history with adverse credit, lenders may be hesitant to lend to you, or may compensate for the additional risk by charging you a higher rate or requiring a larger deposit, so it’s important that you take steps to improve your score before applying for a mortgage.
Here are a few things you can do to improve your credit score:
- Pay bills on time - late payments are a red flag for lenders, so make sure to always pay bills on time. To help you remember, set up direct debits or automated reminders
- Check your credit report for errors - it’s worth regularly checking your credit report for any incorrect information that could be reducing your score. If there are inaccuracies, contact the credit reference agency and ask them to correct the entry
- Reduce your debt - the more debt you have, the less likely it is that you'll be approved for a mortgage. To combat this, consider consolidating loans into one manageable payment or using savings to pay off balances
- Don’t apply for too many credit products - applying for lots of different loans and credit cards can have a negative effect on your score, as it gives the impression that you’re relying heavily on borrowed money
- Register on the electoral roll - being registered on the electoral roll is a key part of verifying your identity and address with lenders, so make sure you’re listed
- Get a credit card and pay it off every month – using and regularly paying off a credit card can actually help you improve your credit score. Just make sure you set up a direct debit to ensure it is paid off every month
By taking steps to improve both your income and credit score prior to submitting an application, you can increase your chances of being approved for a mortgage and securing a competitive rate. However, if you’re struggling to get your finances in order, it’s worth speaking to an experienced mortgage broker like John Charcol that can provide tailored advice and assistance on the best way to move forward.
The Size of Your Deposit
The amount you need to put down as a deposit also has an impact on your borrowing capacity. If you’re able to save more towards a deposit, it could open up more mortgage options and potentially reduce the interest rate you’re offered.
Generally speaking, most UK lenders require a 5% - 10% deposit.
Our guide on house mortgage deposits has more information on how large a deposit you’ll likely need and how your deposit can affect your mortgage options.
Potential Future Changes
Making sure you have the financial capability to take on a mortgage is essential. The lender will assess your ability to pay back your mortgage in the event of changes such as sudden job loss, an illness that prevents work, having a baby, or a rise in interest rates. It's important that you plan ahead and anticipate potential drops in income by consistently saving when possible. Try to put away 3 months of payments, including mortgage instalments. This helps secure yourself against unpredictable circumstances while establishing peace of mind.
To assess repayments over the life of your loan, you can use a mortgage calculator to help determine the financial impact of your borrowing decisions. Our mortgage repayments calculator will help you understand the costs of borrowing and potential repayment amounts.
How Can I Increase My Mortgage Borrowing Power?
If you want the lender to loan you as close to your maximum borrowing as possible, it’s a good idea to take steps to improve your application. Here are several tips to consider:
- Increase your income - increasing your income or salary can help you qualify for a larger mortgage, but obviously this is easier said than done. Consider taking on overtime, second jobs and extra shifts
- Improve your credit history - make sure that all the information on your credit file is correct and up to date by regularly checking it and keep up your efforts to improve your credit score by making sure you pay all bills and debts on time. If you had adverse credit in the past, try to demonstrate that you’ve improved since then by making regular payments and resolving any outstanding debt
- Reduce your other debts - reducing any existing credit card or loan debt will help, as it shows lenders that you’re a responsible borrower and can handle the responsibility of repaying a mortgage. It also leaves more of your income available to cover repayment costs. Overdrafts and payday loans, in particular, should be paid off as soon as possible
- Cut down outgoings – the less the spend each month, the more disposable income you’ll have. This means you’ll be able to afford more in mortgage repayments, which will give you more options when it comes to your mortgage product
- Save up - saving up a larger deposit can reduce your LTV and help you qualify for lower interest rates
- Use an independent, specialist mortgage broker - specialist brokers have access to products and deals that you simply can't find on the high street. While high-street banks have strict criteria and processes, an independent broker can look at your individual circumstances and find a lender that best fits your needs and particular situation. From bad credit mortgages to exclusive products, we can help you source the best deal and secure a bigger loan. At John Charcol, we always strive to provide the best possible advice for our customers. Whether you’re wondering what mortgage you can get on your salary or looking to increase your borrowing potential, we’ll help you find the right deal so you'll be moving home in no time!
Ultimately, the amount you can borrow will depend on your individual circumstances. Remember to also factor in additional costs such as Stamp Duty and legal fees when budgeting for a mortgage. Doing research ahead of time and making sure all your finances are in order before applying can help you find the best deal available.
At John Charcol, we’re proud to provide our customers with expert advice and guidance when it comes to finding the right mortgage. Our experienced advisers are on hand to assist you every step of the way. Get in touch today to secure the mortgage you need easily and quickly.
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