Understanding how much you can borrow is a crucial step in the home buying process, as it helps you to set realistic expectations and find the right property within your budget. Lenders assess a range of factors to determine how much they’re willing to lend you, from your income and credit history to the size of your deposit and the property’s value.
In this article, we’ll break down how lenders decide what you can afford and what you can do to influence their calculations. Whether you’re a first-time buyer or someone looking to move up the property ladder, understanding these key factors can help you make more informed decisions when applying for a mortgage.
How big of a house loan can I get?
Over the past two decades, the way mortgage affordability is assessed has undergone significant changes. In the early 2000s, mortgage lending was more relaxed, with many lenders offering loans based on simple income multiples.
For example, borrowers could often secure up to 5 times their annual salary, meaning someone earning £40,000 could potentially borrow £200,000. Without detailed affordability checks, it was easier to access larger loans – but the 2008 financial crisis forced lenders to rethink this strategy.
As a result, regulators introduced stricter affordability assessments. Lenders began using more comprehensive checks, factoring in a borrower’s total income, outgoings, debts and credit history. They also started to stress-test borrowers’ ability to repay loans at higher interest rates, ensuring they could manage repayments even in the event of economic changes.
In recent years, affordability checks have become even more rigorous, with a stronger emphasis on ensuring borrowers can manage potential financial shocks. Today’s mortgage market is more cautious and sustainable, ensuring that borrowers only take on loans they can reasonably afford.
For prospective homebuyers, these changes mean that securing a mortgage can be more challenging, especially if you have high levels of debt or irregular income. It’s important to demonstrate that you can comfortably manage mortgage repayments, now and in the future. This means being prepared for interest rate rises and unexpected changes in your financial situation.
The upside of this is that it protects buyers from taking on unaffordable debt. The result is a more stable and sustainable housing market, where borrowers are less likely to face financial strain down the line.
Below, we discuss three key affordability check factors in more detail.
The size of your deposit
The size of your deposit directly affects the size of your mortgage and the properties you can afford. A larger deposit lowers your loan-to-value (LTV) ratio, which means you borrow a smaller percentage of the property’s value.
For example, with a 25% deposit on a £200,000 property, your LTV is 75%, making you eligible for better mortgage rates. Lenders typically offer lower interest rates and more favorable terms for borrowers with a lower LTV, as the loan is considered less risky.
A higher deposit not only reduces borrowing costs but also increases the range of properties you can afford. With a larger deposit, you may be eligible for mortgages on more expensive homes. Conversely, a smaller deposit results in a higher LTV, leading to higher rates and stricter terms, limiting the size of the mortgage you can secure.
Your salary
Lenders typically use an income multiple, often around 4 to 4.5 times your annual salary, to calculate the maximum loan amount they’ll offer you. For example, with a £50,000 salary, you could potentially borrow up to £225,000 with a 4.5 times multiple.
In addition to your base salary, lenders may also consider other reliable income sources, such as bonuses, commission or overtime, when assessing your affordability. This could increase the loan size you’re eligible for.
Your typical outgoings
When assessing mortgage affordability, lenders carefully consider your monthly expenses to determine how much you can comfortably afford to repay. This includes regular outgoings such as rent, utility bills, groceries and transportation costs, as well as any existing debts like credit card payments or loans.
Lenders use this information to calculate your debt-to-income (DTI) ratio, ensuring that your monthly mortgage payments won’t stretch your finances too thin. The lower your expenses relative to your income, the higher the mortgage you may be able to afford.
As well as checking if you can afford the initial mortgage repayments, your lender will also assess affordability at higher interest rates. That’s because they need to know you can make repayments after a fixed mortgage deal ends, when you either return to the standard variable rate or get a new fix.
How can I prove affordability?
Demonstrating mortgage affordability is key to securing a loan that fits your financial situation. By understanding how lenders assess your deposit, income and expenses, you can better prepare for the application process and improve your chances of approval. For example, you could:
- Save for a larger deposit: A bigger deposit lowers your loan-to-value ratio and may help secure better interest rates.
- Keep debt levels low: Reducing existing debt makes you a more attractive borrower and boosts your affordability.
- Maintain stable income: Consistent income, including bonuses or overtime, makes you a safer bet for lenders. Consider income protection insurance to make sure you can still afford repayments if you’re unable to work.
By following these steps and understanding exactly what lenders are looking for, you’ll be in a stronger position to secure the mortgage you need and the property you love.
