The mortgage process can be complicated – especially for first-time buyers.
Lenders go through a series of checks and assessments when deciding how much to lend you and whether or not your mortgage is affordable over the long term.
Here, we’ll explain how lenders make these decisions and how the salary to mortgage ratio they use works…
How do I find out how much I can borrow?
The best place to start when finding out how much you may be able to borrow through a mortgage is an online calculator.
Online mortgage calculators are great at giving you an idea of your borrowing potential – but it’s important to remember it is only an ‘idea’.
Most online calculators ask for details on:
• How much you earn
• How many dependents you have
• Existing debts
The calculator will then present you with the potential mortgage amount you could borrow to buy a property, based on that basic information.
Whether or not you can actually borrow that amount will depend on more in-depth assessments carried out by your lender when you apply.
How mortgage lenders assess your income
When you come to apply for your mortgage, your lender will require a whole host of information on your income, debt levels and lifestyle spending habits.
They’ll look at:
1. How much you earn
If you’re employed, your lender will take your annual salary into account, as well as other income streams like:
• Pension income
• Investment income
• Child maintenance or ex-spouse support
• Overtime payments
• Commission
• Freelance income
2. Your outgoings
Your lender will offset any regular outgoings you have against your total income, including:
• Credit card payments
• Child maintenance payments
• Insurance policies
• Loans or hire purchase agreements
• Utility bills, mobile phone and broadband costs
• Any other living costs, such as childcare and recreation
3. Repayment affordability
As well as assessing your income and outgoings, your lender will perform a ‘stress test’.
This takes into account any future events that could affect your ability to pay back your mortgage, including:
• A rise in interest rates
• Redundancy or job losses
• Long-term illness
• Having a baby or taking a break from work
What you’ll need to give your mortgage lender
In order for your lender to undertake income and affordability assessments, you’ll need to provide them with a number of important documents.
These include:
• Payslips from the past three to six months to prove your income
• Bank statements from the past three to six months showing outgoings
• Your latest P60 showing your annual income
• Proof of any other income, such as investments, dividends or incoming child maintenance
Your lender will also need:
• A certified copy of your passport or driving licence for proof of identity
• A certified copy of a recent utility bill for proof of current address
If you’re self-employed, you’ll need to provide:
• An SA302 tax return form showing your earnings from self-employment
• Two to three years of certified accounts if your business is incorporated
• Additional proof of dividend income on top of any salaried earnings
Some lenders may require additional information or documentation, depending on the individual nature of your application.
What salary to mortgage ratio do lenders use?
The standard salary to mortgage ratio used by lenders is 4.5 times an annual salary.
This means you can potentially borrow 4.5 times your annual salary as a mortgage.
So, if you earn £40,000 per year, you might be offered a mortgage of £180,000 – although that simple equation doesn’t factor in any debt or outgoings you may have.
Can I get a mortgage that’s five times my salary?
Although an income to mortgage ratio of 4.5 times your annual salary is commonplace, some lenders offer ‘professional’ mortgages of up to five or 5.5 times an annual salary.
These loans are reserved for high earning, securely employed professionals like doctors or dentists or borrowers with household incomes greater than £80,000.
Can I get a mortgage that’s six times my salary?
Mortgages of six times annual income are rare and reserved for high earners with no or very little personal debts.
There are also likely to be maximum loan size restrictions on these loans, as well as a maximum loan-to-value percentages and you’ll almost certainly pay a higher interest rate, too.
How can I increase my chances of getting a mortgage?
The best way to boost your chances of being accepted by a lender and getting the mortgage you want is to lower your debt-to-income ratio (DTI).
As part of their assessment, lenders will calculate your DTI based on your earnings and level of debt.
By reducing your debt before applying for a mortgage, you’ll in turn reduce your DTI – making you more attractive to lenders.
To work out your DTI:
• Add up all your monthly living costs (including your projected monthly mortgage payment), credit card payments, loans or hire purchase payments
• Add up all your monthly incomings, including your salary before deductions, any benefits, child maintenance, additional income or investment payments
• Divide your total monthly debt by your total monthly income
• Multiply this by 100 to get your DTI
For example, a monthly debt of £1,200 and a monthly income of £3,400 would result in a DTI of 35%.
The lower your DTI, the more chance you have of being approved for a mortgage.
How does loan to value affect borrowing potential?
Loan to value (LTV) is the percentage of your property’s purchase price covered by a mortgage.
So, the higher your LTV, the bigger the risk for your lender.
By saving a larger deposit, you’ll lower your LTV and be more attractive to mortgage lenders.
This could mean you also get access to more attractive interest rates, meaning you’ll pay less over the term of your mortgage.
Further reading…
If you’re buying a home for the first time, you may have heard of the Shared Ownership scheme. Our guide tells you everything you need to know about Shared Ownership, so you can decide if it’s right for you.
