The most common way people find out what size of mortgage they can get in the UK is by using a mortgage calculator. Whilst mortgage calculators can be helpful, it’s important to understand that they don’t give you the full picture.
When lenders look at how much they are willing to lend you, their calculations are way more complex than simply using a particular multiple of your income. They will also look at your existing financial commitments, how much deposit you have available, your credit rating, your employment and/or income type and your age, not to mention the property itself.
How much you need to earn to get a mortgage of £200,000, for example, will therefore depend on your circumstances. Whilst most lenders will use a multiple of around four to four and a half times your income (£44,500 - £50,000), this won’t necessarily be the case if you have lots of outgoings, poor credit, fluctuating income or want to buy a non-standard property.
Equally, certain applicants may be able to borrow more than the average multiple of their income. This usually applies to those in certain professions, or with a higher than average income who can sometimes borrow five to six times their income, or even more in the case of high net worth individuals.
5% is the minimum deposit you will currently need to put down in order to get a mortgage in the UK. This means that to buy the average UK house, which is currently priced at £296,000*, you'd need a deposit of at least £14,800.
*As as August 2022, source ONS
However, if you can afford to offer more than the minimum 5% deposit, you will reduce the LTV (loan to value) of your borrowing. This will give you access to lower interest rates and potentially allow you to buy a more expensive home.
It’s also important to realise that not all lenders will be happy to accept a 5% deposit, and that some applicants will need to put down more depending on their circumstances and the type of purchase they are making.
If you have poor credit, are an older borrower or have a less stable income, most lenders will want you to balance some of their additional risk in lending to you with a larger deposit of 10-15%. You will also need a larger deposit for buy-to-let property purchase, typically between 25-40%.
The loan to value (LTV) is the amount you are borrowing compared to the property price - so with a 5% deposit you will need to borrow 95% of the cost of the property you want to buy from the mortgage lender, or 95% LTV.
Example: For a £100,000 property
95 LTV - you would borrow £95,000 and need a deposit of £5000
80 LTV - you would borrow £80,000 and need a deposit of £20,000
60 LTV - you would borrow £60,000 and need a deposit of £40,000
Interest rates tend to reduce as the LTV lowers, so if you only borrow at 90% LTV, you should be offered better rates than you would be at 95% LTV. The most competitive interest rates are reserved for those with the lowest LTV, therefore, those who have the largest deposit.
Lenders look at a whole host of factors when deciding whether to lend to you and how much you can borrow, but their main focus will be on affordability and credit score. The amount of deposit you have will also play a role in this, as this will affect your LTV, as explained above, and each lender has a maximum LTV that they will be happy to offer in any situation.
Each lender has slightly different criteria to the next, but most will look at:
The amount you need to borrow
The size of your deposit
Your employment type and status
Your income, taking into account all current outgoings
Your credit status and level of debt
The property type
The majority of lenders use a multiple of your income (bearing in mind that this won’t all be expendable income if you have existing outgoings) to decide how much you can borrow.
Those with poor credit, newly self-employed or with other complex financial circumstances will typically be offered 3-4 x their income
The average borrower can expect to be offered a loan of around 4 - 4.5 x their income
Certain professionals (such as doctors, lawyers, vets etc), and higher earners could be offered around 5-6 x their income
High net worth individuals may be able to borrow 6+ x their income
According to ONS, the average salary in the UK is £33,000 in the tax year ending April 2022. On this salary, you could therefore expect to borrow around £132,000 - £148,500, so long as you have a good credit score.
If you apply jointly with another applicant or multiple applicants, the way your loan size is calculated will depend on the lender. Most will use one of the following two methods, and will generally be happy to use whichever of these gives you the highest loan offer:
1. Highest income x 4-4.5 + lower income(s)
Highest income £30,000
Lower income £20,000
[£30,000 x 4] + £20,000 = £140,000
2. Add both incomes together x 3-3.5
Income 1 - £30,000
Income 2 - £20,000
[£30,000 + £20,000] x 3 = £150,000
Lenders use your complete credit record, rather than simply a score when they carry out a mortgage credit check. They are interested in how you have managed using credit in the past, and how much debt you currently have.
Many will use what’s known as a debt to income ratio, and most will be looking for this to be below a certain level, typically between 35-50%, however, some lenders assess this on a case by case basis.
Having poor credit won’t necessarily mean that you can’t get a mortgage, but it could narrow down the pool of lenders available to you and reduce the amount you’re able to borrow. Bad credit lenders are the most flexible with lower credit scores, so it’s worth checking your credit file before you look for a mortgage, so that you can approach the right type of lender for your circumstances.