First time home buyer and wondering 'how much can I borrow for a mortgage?'. The process of finding the best mortgage has become more complicated since new, more rigorous rules were introduced in 2014. Much more is now taken into account than just your income, so – don't put too much trust into what your bank's online calculator is telling you and pay attention to these essential criteria the lender will use to determine how much you can borrow.
Find out more about mortgages for first time buyers in our guide.
Mortgage calculators: what they can and can't tell you
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Most people who have never had a mortgage will head straight to an online mortgage calculator to get an estimate of how much they can borrow. Banks often have these free calculators, with some of them giving you the simplest estimate based on your income, which is called the loan-to-income ratio.
Most lenders will allow you to borrow an amount somewhere between three and 4.5 times your salary – or the combined salary of you and your partner if you are buying jointly. Some calculators will also give you an idea of what your monthly repayments will be on the basis of the mortgage repayment interest rate, amount borrowed, and length of mortgage. These are all useful tools and can give you an idea of the basic numbers. Having said that, there are a lot of individual circumstances these tools do not take into account.
If you do want guidance on the best mortgages, how much you can borrow, and putting your application together, it's best to start with a free calculator to get an idea, then move beyond that and actually speak to a mortgage broker or mortgage advisor. Online brokers who provide this service make life easier – Habito, for example, is a company we've teamed up with. They will assign you a dedicated, unbiased mortgage expert who will help you look for the best deal, give you advice and help you get your documents in order. See their form below.
Can I afford a mortgage? Passing the affordability test
When you apply for the mortgage, the mortgage lender will ask you detailed questions about your monthly outgoings. This will include questions about the following (the exact questions will vary between lenders):
- Outstanding debt, eg, credit card repayments or student loan repayments;
- Any child maintenance paid to/from ex-partners;
- School fees;
- Monthly utility bills;
- Insurance payments, eg, car insurance, home contents insurance, pet insurance;
- Spending habits on leisure activities, eating out, etc.
These questions can feel intrusive, but what the lender must know is whether after all your monthly outgoings you'll still be able to pay your mortgage. How much you're left with after everything's been taken out will partly determine how much you can borrow. If the mortgage, together with all your expenses, will put you on the edge financially every month, the lender may choose to reduce the amount you can borrow.
Generally speaking, your financial history going back three months before the mortgage application matters the most, so take care to live well within your means in the months preceding your application. Some lenders may even want to see bank statements. Don't worry: your lender won't turn you down because you like to eat in nice restaurants, but they might get worried if your habits are consistently putting you in financial difficulty at the end of the month.
Bear in mind that this assessment is on top of the usual credit rating checks, which also affect the amount you can borrow, but most importantly are used to determine whether you qualify for a mortgage at all. Be very careful with paying all your bills on time: any defaulting on payments, even it's just on a phone bill, will count against you for a year, and will be on your credit record for six.
Mortgage stress test: what lenders take into account
The final amount you can borrow for a mortgage is directly linked to how much you can afford to repay every month – and lenders will want to know that you can still make those repayments if the interest rates rose by three per cent (or even six or seven, depending on your lender). There are other circumstances lenders will want to consider, such as:
- If you or your partner lost your job or took a career break;
- If you started a family;
- If you had a long-term illness that reduced your income.
If the lender concludes that any one of these circumstances would compromise your ability to make mortgage repayments, they again may choose to lend you less. Having savings plays a huge part in assuaging these worries: being reassured that you have a rainy day fund is guaranteed to make your lender more generous with the amount you can borrow.
Should I take the full amount I can borrow?
If you can afford to, no. Basically, the higher the deposit you can pay, the better your mortgage deal – a lower interest rate and lower monthly repayments. The sweet spot for getting a better mortgage deal is a 25 per cent deposit. The optimal amount for the best possible mortgage deal is 40 per cent. So, if your lender is prepared to let you borrow 90 per cent of the cost of the property, but you can afford to pay a 20 per cent deposit rather than a 10 per cent one, paying a larger deposit and borrowing less is always better.
We've teamed up with online mortgage advisor Habito. Use this form below to get an idea of what you can borrow, then speak to an advisor for unbiased advice about taking out a mortgage, help seeking out the best deals, and answers to queries you may have. They can use their insider knowledge to negotiate the best deal based on your financial history and current status, too.