The amount you can borrow, and the interest rate you will be offered, will be based almost entirely on your salary and the size of your deposit (or the equity in your house if you’re remortgaging).
The other important calculation is affordability: every mortgage lender must ensure that you can actually afford the monthly repayments, taking into account your other regular outgoings and if the interest rate goes up dramatically over the next few years.
What’s the maximum mortgage you can get?
Your maximum mortgage can be obtained via a very simple calculation: the total income of each person named on the mortgage, multiplied by a number that is usually between 4 and 5.
The multiplier will vary from lender to lender, and also how confident the lender is that you’ll be able to repay the mortgage. Some higher multipliers (higher than 4.5x) are only available if you have a current account with the bank or building society, or if you have a very large deposit.
For example, if you and your partner have a gross (before tax) combined income of £80,000, mortgage lenders will probably offer between £320,000 (4x) and £400,000 (5x).
To get an accurate maximum mortgage figure, you have to apply for an agreement in principle (AIP). This can be done yourself, by looking up a good mortgage deal and applying for an AIP online, or through a broker. It doesn’t take long to get an AIP.
With an AIP in hand you can start looking at properties with some confidence that you’ll be able to borrow a certain amount of money – but be aware that you’ll be subject to some stringent checks before the lender actually approves the mortgage.
How do you get the best mortgage interest rates?
The best mortgages, with the largest multipliers and lowest interest rates, are only available if you have a large deposit (or equity in your property, if remortgaging). In mortgage terms, the size of the deposit versus the property value is referred to as LTV, or loan-to-value.
You will need a deposit of at least 5% (LTV 95%) to buy a house, but if you can get to 15%, 25%, or even 40%, you will increase your chances of being accepted for the best mortgage products.
For example, if you want to buy a property worth £400,000, you will need a deposit of at least 5% or £20,000 – but with a bare minimum deposit (LTV 95%) you’ll probably only get a two-year fixed interest rate of 2.5%. The monthly repayments would be around £1,700.
If you can raise a deposit of 15% or £60,000 (LTV 85%) on that same £400,000 property, you can find interest rates as low as 1.4%. This would drop the monthly repayments to just £1,350 – or a total savings of £8,400 over two years versus the 5% deposit mortgage.
Of course it can be rather hard to raise a deposit of 15% or more, especially in an expensive city like London – but still, if you can save up a larger deposit, it is well worth doing so.
Should you borrow your max mortgage?
It can be tempting to borrow your maximum mortgage amount and buy the most expensive property you can afford – but that isn’t always the right thing to do.
To begin with, one of the best ways to boost your LTV is to borrow less money. 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 have the worst interest rate, 90% LTV is slightly better, and then it keeps on improving at 85% LTV, 80% LTV, etc.
If you’re looking at buying a property and your LTV would be 87%, you might consider raising a larger deposit to push yourself over the 85% LTV threshold. Likewise, it might be worth looking at a slightly cheaper property, where the same size deposit would provide a better LTV.
Another factor to consider is affordability. Your mortgage lender will perform an “affordability stress test,” which will involve a deep dive into your finances – to check if you could still afford your mortgage if the interest rates go up by 7%, or if your financial situation changes over the next few years. Ultimately, the main thing you are trying to avoid is becoming “house poor” – where you own a house, but you have no funds left to pay for everyday stuff without going into debt.
How to drop your LTV band if you’re remortgaging
If you’re remortgaging your home, the exact same rule of thumb applies – you want the lowest LTV possible – but instead of raising a big deposit you get to use the equity in your home.
For example, imagine if you borrowed £360,000 to buy a home valued at £400,000 – so, a deposit of £40,000 and an LTV of 90%. A few years have passed and you now want to remortgage to a better fixed-rate mortgage. In that time you’ve paid off £40,000 from the principal debt and your home has gone up in value to £420,000.
When you apply for a new mortgage, you only need to borrow £320,000 for your £420,000 home – an LTV of just 76%, which will give you access to some of the best mortgage products with very low interest rates.
But you can drop the LTV even further! If you add £5,000 of your own savings you would hit an LTV of 75%, which would give you access to lower interest rates. Or alternatively, if you’re feeling particularly savvy, you can get a slightly higher valuation for your home: a valuation of £430,000 would give you an LTV of 74%.
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 over the next few years.
How big a mortgage can you get if you’re self employed?
You can still get a mortgage if you’re self-employed or in a partnership, but there are more hoops to jump through than if you were an employee. The main issues are that lenders will think that you’re a riskier proposition, and that you’ll need three years of business accounts and tax returns that have been signed by a chartered accountant.
If you can provide three years of business history, your max mortgage will 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 max mortgage on your past trading history, while others might want a projection of your future customers and income.
You can increase your chances of being accepted for a good mortgage if you have a large deposit, a good credit history, and if you jointly apply with someone who has a regular employee income.
Generally, though, if you’re self-employed, your first port of call should be a mortgage broker. They will know which lenders you will most likely be accepted by.