How much you can borrow with a mortgage is determined by several things: how big your deposit is, how much you earn, your credit score and your current debts.
You can use an online mortgage calculator to quickly estimate how much you could borrow.
Whilst many first time buyers may want to get the biggest mortgage they can, you need to think critically about how much you're borrowing and how much your mortgage will cost you.
Make sure you don't overstretch yourself. Try to ensure that your budget can handle increases in interest rates so you won't struggle if your repayments become more expensive.
The first thing you need to work out when you start applying for a mortgage is:
How much deposit can I afford?
What is the deposit and loan to value (LTV) ratio?
The loan-to-value ratio is the size of your mortgage deposit compared to the value of the property you are buying. This ratio will determine the size of your loan.
Your loan to value ratio is one of the biggest factors in deciding how much you can borrow and how expensive your mortgage will be.
Typically you need at least 10% of the home’s value as a deposit to get a mortgage. So, to buy the average UK house costing £250,000, you'd normally need at least a £25,000 deposit to borrow the £225,000 required to buy the house.
However, with the government's Help to Buy scheme, first-time buyers can get a mortgage with a 5% deposit. So, you could buy a £250,000 home with a £12,500 deposit.
It is worth noting that the bigger the deposit you can put down, the lower your interest rates will be, which could shave thousands of pounds off your mortgage in the long run.
100% LTV Mortgages – a rare and risky mortgage that requires no deposit but may require guarantors.
95% LTV Mortgages, 90% LTV Mortgages and 85% LTV Mortgages – these are at the high end of available LTVs, offering the most expensive rates, but they can help first-time buyers get onto the property ladder.
80% LTV Mortgages, 75% LTV Mortgages, 70% LTV Mortgages and 65% LTV Mortgages – these are in the mid-range of LTVs, offering competitive rates that give manageable monthly repayments.
60% LTV mortgages – these are the lowest available LTVs, and they provide the cheapest rates. Raising a 40% deposit might be tough, but these mortgages will deliver some big savings.
Paying £500 a month over 25 years means you are paying back £150,000, but your mortgage will also include interest - which is charged per year on the total value of the loan. And interest rates can change - meaning lenders like to be sure you’ll be able to afford your mortgage in the future as well as at the moment.
So, while you may be able to repay £150,000 and put down a deposit, mortgage lenders will want to look at other criteria.
The maximum amount of loan you can borrow will depend on:
Employment status: are you employed or are you self-employed?
What do you earn, including income outside of your salary?
How much money do you have to spare each month once essential bills are paid?
The maximum amount you’ll be able to borrow will vary depending on the lender, which is why you need to compare mortgage lenders and shop around first.
Typically you can borrow around 4.5 times your salary.
Before you approach a mortgage adviser or lender, you should consider if you can comfortably meet the potential monthly mortgage repayments for the sum you need to borrow. This is more important than getting the biggest mortgage possible.
The size of the repayments decides whether you can afford your mortgage on an ongoing basis. If you think the repayments will put too much of a strain on your budget, then the chances are you won't be able to borrow that much.
Our mortgage comparison tables enable you to see the different monthly repayments you could have with different mortgages and amounts.
Make sure to plan for the future, as interest rates will affect the size of your repayments. Current interest rates are at historic lows and are likely to rise sometime in the future, meaning your monthly repayments will probably rise unless you use a fixed-rate mortgage.
When deciding whether or not to lend to you, most mortgage providers will assess your financial circumstances:
What is your salary? Do you have a stable income source?
Your income is the key factor in determining how much a mortgage provider is willing to lend you. You will need to prove your declared income with payslips or other official documents.
Traditionally, the size of a mortgage is decided by applying a multiplier to income. For example, if you earn £25,000 a year, a lender might multiply that figure by four to arrive at a mortgage offer of £100,000. It's rare for a lender to multiply your income by a lot more than four.
If your household has two incomes, these are typically combined in one of two ways.
Add the lowest income on top of the highest after multiplying. So if the highest income was £30,000 and the lowest was £20,000, the offer could be £140,000 ([£30,000 x 4] + £20,000 = £140,000).
Add both incomes together and use a lower multiplier figure. So for the same incomes this could result in an offer of £150,000 ([£30,000 + £20,000] x 3 = £150,000).
Lenders tend to use whichever method results in the higher figure.
Mortgage lenders will often also consider your outgoings when deciding how much to offer you. These include things like:
Your credit score is very important in determining your eligibility for any form of borrowing, and mortgages are no exception. All providers thoroughly examine your credit report to make their decision.
Checking your credit report is important before applying for a mortgage, as you can check for errors and correct any you may find. If you have a poor credit score, you can also discover the cause and take steps to improve your credit score.