Mortgage calculation: How much can I borrow?

The amount you can borrow for a mortgage, and the interest rate offered on it, will be based almost entirely on your income and the size of your deposit. These days, the maximum loan you’ll be offered is four and half times your salary.

Following the financial crash in 2008, every mortgage lender must perform affordability checks before loaning you any money to ensure you can afford the monthly repayments. The lender will also analyse if you could afford the repayments should the interest rates increase dramatically or your circumstances change.

How much mortgage can I get?

Generally speaking, the maximum mortgage you can get is 4.5 times the combined total income of each person named on the mortgage application – though you may only be able to get this full amount if you already have a current account with the lender or you have a very large deposit. Comparing the loan amount to your income is known as the “loan-to-income” ratio.

There is no guarantee you will get the full 4.5 times when you apply, because there are a number of other contributing factors outside your income, like your credit score and what your outgoings amount to.

For example, if you and your partner have a gross (before tax) combined income of £80,000, the absolute maximum a lender will likely loan you is £360,000.

That said, a few lenders are now offering mortgages at five times your total income – but they’re rare and hard to get.

To get an accurate maximum mortgage figure, apply for an agreement in principle (AIP). This is an estimate of what a lender might lend you should you apply for a mortgage with them. It’s worth getting one before you put an offer on a property because most estate agents will not take you seriously without one.

You can secure an AIP quickly online or through a broker. It is not the same as an actual mortgage offer and you’ll be subject to some very stringent checks before the lender actually approves the mortgage.

For more information on AIPs, read our full guide.

How much deposit do I need to get a mortgage?

You will need a minimum of a 5% deposit to secure a mortgage, meaning you’ll need a 95% mortgage loan. The size of the loan versus the property value is referred to as loan-to-value ratio, or LTV.

If you are able to save more, for instance a 10, 15 or 20% deposit, you’ll increase your chances of being accepted for cheaper mortgage products. Lower interest rates (and small set-up fees) equal cheaper mortgages.

The cheapest mortgages are generally only available if you have a big deposit, or – if you’re remortgaging or moving house – a large amount of equity in your property.

Read our guide on how long it takes to save up a deposit

How do lenders assess my affordability?

Most AIPs only require a soft search on your credit file, which means other lenders will not see it. A real mortgage application will leave a mark on your file that all other lenders will be able to see. Generally, having more marks can count against you because it could suggest you are desperate for credit. Being turned down for a loan product will have a negative impact on your credit file.

Mortgage lenders will review your credit file in depth to make absolutely sure you could afford the monthly repayments of the mortgage you’ve applied for. Each lender has their own scoring system – it does not see the score you do, that’s just for you – and may check one or more of your credit files (from Experian, Equifax or TransUnion), so it is vital you check all three before you apply for a mortgage.

See our full guide on credit scores

Lenders want to know how stable an investment you are by looking at how long you’ve been in a job, lived at your current address and had a bank account.

Income vs. outgoings

On application, mortgage lenders will look at your salary, guaranteed bonuses, pension, investments and any other income you have. You’ll need to prove your income with payslips and bank statements. If you are self-employed, there are some additional hoops to jump through (see below for more details).

Lenders will also closely examine your outgoings. More than just your rent (or current mortgage repayments if you’re remortgaging), which is likely your biggest monthly expense, they’ll look at other regular bills (credit cards, mobile phone, broadband, utilities) as well as your living expenses.

If you are down to £0 the day before pay day, or worse still, you’re in your overdraft, and your bank statements show you eat at restaurants four times a week, you could find it very hard to get a mortgage as it will look like you cannot manage your money.

For that reason, it’s worth trying to get your finances in order at least six months before you apply for a mortgage.

“Stress testing”

You might be able to afford the monthly payments if you secure a mortgage with a low interest rate, but what would happen if rates increased to 3% above the lender’s standard variable rate (SVR)? The average SVR today is 5.11% – so you would be stress-tested on an interest rate of around 8%. This is known as “stress testing”.

Could you afford the repayments should your personal circumstances change? That is not just what a lender considers, but something you will need to ask yourself too.

Having enough savings to cover three months of mortgage payments could really be worth your while in case your circumstances change – for instance, if you lose your current job.

Lenders may limit the amount you can borrow based on their findings.

Should I borrow the maximum amount?

It can be tempting to borrow your maximum mortgage amount and buy the most expensive property you can afford – but that may not be the right thing to do as it leaves you little wiggle room if rates go up or your income goes down…or both!

To begin with, one of the easiest ways to lower your monthly repayments is to borrow less money, giving you a lower LTV. If you have £20,000 as a deposit, that’s only 5% of a £400,000 property, but 10% of a cheaper £200,000 property.

The other thing to consider is that mortgage products are usually arranged in a tiered fashion, with a lower interest rate offered every time your LTV goes down by 5%. So, 95% LTV mortgages generally have higher interest rates than 90% LTV mortgages, which have higher rates than 85% LTV mortgages and so on.

If you’re looking at buying a property and your LTV would be 87%, you might consider raising a slightly larger deposit to push yourself over the 85% LTV threshold, otherwise you’d be stuck at 90%. Likewise, it might be worth looking at a slightly cheaper property, where the same size deposit would provide a better LTV and allow you to keep some money aside.

Borrowing the maximum amount possible could leave you “house poor” – where you own a house, but you have no funds left to pay for everyday stuff without going into debt.

How can I drop my LTV band if I’m remortgaging?

If you’re remortgaging your home, the exact same rule of thumb applies – you want to aim for the lowest LTV possible – but instead of raising a big deposit you get to use the equity in your home.

For example: you raised a deposit of £40,000 and borrowed £360,000 to buy a home valued at £400,000 (an LTV of 90%). Now the five-year fixed-rate deal deal has ended, you want to remortgage to a new fixed-rate mortgage. You’ve since paid off £40,000 from the principal debt – so you owe the lender £320,000 – and your home has gone up in value to £420,000.

Assuming you want to get a new mortgage for the same amount – £320,000, with £100,000 in equity – you would have an LTV of just 76%.

However, a 76% LTV mortgage will most likely have the same rates as an 80% LTV mortgage. To drop to a 75% LTV (and therefore lower the interest rates) you would need to add £5,000. Alternatively, you could try and get a slightly higher valuation for your home, which would help you drop to a 75% LTV.

If you’re remortgaging to unlock money for home improvements or other expenses, try to keep your LTV tier in mind. If you can stay within a lower LTV tier, perhaps by borrowing slightly less, you’ll save a lot more in interest repayments in the long-term.

How much mortgage can I get if I’m self-employed?

First things first, you can still get a mortgage if you are self-employed, you’ll just have a few more hoops to jump through than if you were a full-time employee.

Lenders will consider you more of a risk, so you will need to gather together at least two complete tax-years of business accounts and tax returns. Some lenders require that the documentation has been signed by a chartered accountant to prove that the information you’ve provided is reliable.

Your maximum mortgage will then be based on your net profit, not total turnover. The exact calculation will vary from lender to lender, and also on your legal status – self-employed is different from the sole director of a limited company, for example.

Some lenders may base your maximum mortgage on your past trading history, while others might want projections of future customers and income. Organise both, just in case.

If you’re self-employed, speaking to a mortgage broker is pretty much a must. They will know which lenders will most likely accept you, therefore cut the chance of a credit score-damaging rejection.

Now read: Should I use a mortgage broker?

Edited by: Sarah Guershon

Last updated: 31 January, 2019

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