Before you start making offers on your next home, it's a good idea to know your budget - including how much you can borrow on a mortgage.
A mortgage is a loan, and it’s probably the biggest loan you’ll ever take out. So, it’s vital to make sure you only borrow as much as you actually need.
But how do you work out how much you need to ask the lender for?
Getting a mortgage isn’t quite as simple as asking your lender for the money to buy a house.
You’ll need to make sure you have a deposit together, as well as proof that you can pay the mortgage back. That usually means you’ll need to show that you have a regular income.
Most providers do offer several types of mortgage calculator to help with this. For instance, calculators that work out how much you can afford based on your income, or that show how much you'll need to repay each month.
Working out what you can borrow can be quite a complex calculation, and it’s based on a variety of figures and factors including your income, credit history, your deposit, and the value of the property itself.
How much you actually need to borrow for your mortgage depends on what deposit you can get together, and the loan-to-value (LTV) ratio of the mortgage itself.
Loan-to-value is the percentage of the property's you take as the mortgage. So, if you have a £200,000 property, and a deposit of £50,000, you’d take a £150,000 mortgage. As such, you’d have a loan-to-value ratio of 75%.
Your lender will need to know what your income is Ultimately, it wants you to be able to repay your mortgage in full, plus interest – so if you’ve got a lower income, you might not be able to get the mortgage you want.
This might sound like you’re excluded from having a mortgage if you’ve got a low income and/or can’t get a decent-sized deposit together - but this isn’t necessarily the case.
There are a number of lending schemes that might help you borrow what you need.
A potential option is the government's help-to-buy scheme. It operates slightly differently in England, Wales, Scotland and Northern Ireland, but roughly, if you can get together 5% of the total value of the property you’re looking to buy, the government can lend you money towards a higher deposit.
Having a larger deposit makes it more likely that you’ll be accepted for a mortgage – so this could be quite a useful scheme to consider.
There are downsides though. As it’s a loan and not a grant, it’ll have to be paid back, although not immediately. Be sure to research all the terms and conditions thoroughly, and weigh up all the pros and cons before committing.
Alternatively, you may wish to consider a shared ownership scheme. This involves you buying a share of the property – normally between one and three quarters – and then renting the rest until you can afford to buy another share of the house.
If you’re a housing association tenant, or you live in a council house, the Right to Buy scheme could help you buy your house for less than its market rate.
Of course, it's not just your income that determines how much you can borrow. What you do with your income matters just as much. Your outgoings, your credit history, and whether you have any dependants or a partner will also have a bearing on your mortgage.
The duration of your mortgage will also have an impact on how much you can borrow.
But why does that all matter? Well, it’s all to do with risk. Someone who consistently lives beyond their means is less likely to be approved for any kind of mortgage.
Conversely, someone with a good credit history who budgets effectively is more likely to be approved for a high-LTV mortgage over a longer term. Fiscal responsibility is very reassuring to the lender!
There’s a lot to consider before diving into mortgage applications.
How much you can afford to borrow depends on your deposit, your income, your credit history, and the value of the property itself. If you’re concerned about any of these, talk to an independent mortgage adviser before getting stuck into the application process.