How much can I afford to borrow?
The amount you can borrow depends on your circumstances. To assure your mortgage lender that you can keep up with your repayments, they’ll look at the term of the mortgage (the number of years the payments are spread over), the size of your deposit (the amount you pay up front), your income (sole or joint, whichever is applicable), your outgoings, and credit score.
Before 2014 when the Financial Conduct Authority (FCA) introduced a number of changes to how affordability was determined, it’s likely you’d have been able to borrow between three and five times your annual income. But now mortgage lenders can no longer solely use income to determine affordability.
Since 2014, the way lenders calculate the amount you could borrow includes the following elements:
Your income - this covers your basic salary, as well as any income from investments, pensions, or financial support. You’ll need to provide evidence of your income in the form of payslips or accounts, supported by bank statements. Tax returns, pension statements, rental income proof, and benefit award letters may also be required.
Your outgoings - this could include credit card repayments, any insurance direct debits, your monthly bills, childcare costs, personal loans, student loans, car finance, purchases on credit, maintenance, and other loans.
A ‘stress test’ - this relates to future changes that may impact your ability to afford monthly payments, such as:
- if you or your partner lost their job
- if you decided to have children or more children
- if you or your partner could not work due to illness
- if interest rates increased
There’s no predetermined amount you can borrow - it’s based on what you disclose. The information you provide at the Mortgage In Principle (MIP) stage, along with any credit checks, will enable the lender to decide whether they’d be happy to lend you a certain amount of money, but it’s not a guarantee. Once you go through the full application process, your earnings and credit history will be examined in more detail by the lender’s underwriter.
By using a mortgage calculator - such as Trussle’s affordability calculator - you can find out how much you could afford to pay each month, get a clear oversight of your monthly income and outgoings, budget accordingly, then receive a mortgage recommendation for a deal that suits your needs.
How much deposit do I need?
Lenders typically require a minimum of 5% of the overall loan amount upfront in the form of a deposit. The general rule is: the larger the deposit, the wider and better the range of options available to you. If you put down more than a 10% deposit, you’ll start to see more competitive deals being available to you.
The average price of residential property in the UK starts from around £228,000 for a flat or maisonette, and around £349,000 for a detached house (Jan 2018).* So to buy a house worth £349,000, you'd need to save at least £17,450 to achieve the minimum 5% required by lenders.
Some government schemes will allow you to put down a smaller deposit, such as Shared Ownership. In addition to your mortgage repayments, you’ll have to pay rent on the part you don’t own.
You’ll have a much wider choice of lenders and deals if you can provide a 10% deposit. A 25% deposit will usually be enough to unlock more competitive deals on the market that you qualify for, while a 40% deposit will unlock the most competitive deals for you.
There are additional charges you’ll need to take into account - solicitor’s fees, valuation costs, and insurance payments to name but a few. For first-time buyers, stamp duty is waived on the first £300,000 of any property worth up to £500,000.
You can find out how much you could afford by using Trussle’s online affordability calculator.
Can I get a mortgage with bad credit?
All lenders will conduct a credit check before granting an application for a mortgage. Some issues will carry more weight than others, depending on the amount of money involved and how long it’s been since the incident occured.
There are some lenders that do consider applicants who’ve experienced issues with credit, but their mortgage deals will often have higher rates and fees, and they may require a larger deposit.
If you have what a lender views as a smaller credit issue, and the rest of your application is sound, it’s likely that some of the high street lenders will consider offering you a deal. If you have more severe credit issues, you may need to speak with a specialist mortgage broker or lender to discuss your options.
Some lenders will only accept applicants with bad credit that use a mortgage broker, so you may find more lenders are available to you using one. This includes specialist lenders who are more likely to accept you and offer you a more flexible deal, especially if you’ve faced illness, divorce, or other adversities.
Bad credit mortgage loans with guaranteed approval don’t exist - a lender will always want to know who they’re lending to. Again, a mortgage broker will be able to help you assess your options.
Can I get a mortgage with debt?
This depends on your debt-to-income ratio (the portion of your monthly gross income that goes towards paying the minimum amounts due on recurring debts, such as credit card bills, student loans, and car loans).
Taking out a personal loan in the run up to applying for a mortgage could make it more difficult to be accepted - the loan repayments will reduce the amount of cash you have free each month to cover your mortgage repayments. If you make too many applications for credit and receive rejections, lenders may think that you’re financially overstretched, suggesting to them that you may not be able to cover repayments on new forms of credit.
It’s advisable to cancel any unused credit cards before you apply for a mortgage because lenders look at the amount of credit available to you and not just the amount you actually owe.
How can self-employed buyers get a mortgage?
If you’re self-employed, you should be able to successfully secure a mortgage, providing you can show the following:
- A steady income for the last two or three years.
- Two years’ accounts, up-to-date and in order. Lenders generally base their calculations on your average profit in the past few years and prefer you to employ an accountant to prepare your accounts. Some may insist that they’re certified or chartered.
- A track record of regular work and evidence of future work lined up.
- A good credit history.
- A healthy deposit.
- Lenders will also take into account the type of property and your outgoings.
- If you’re a sole trader, you may have to produce an SA302 (an HMRC certified document) and tax year overview. If you’re a limited company, you’ll normally need to show two years’ accounts.
Most lenders will calculate how much they’re prepared to lend by taking an average income figure based upon the last two or three years. Others might look at the most recent year of trading.
There aren’t specific self-employed mortgage products; whether you’re a freelancer, a contractor, or a small-business owner, you’ll have access to the same products as full-time employees.
Can I get a mortgage without a current job?
With no job income verification, it can be difficult to secure a loan. But, it isn’t impossible. Some lenders will look at other income sources such as pensions, certain benefits, tax credit, and rental income.
Most lenders have different requirements, but they all share one thing in common - you must have a reliable source of income. If you’re making any sort of money from side projects, you should share this information along with proof of income, and show proof of any savings, should you have some.
If you have a job lined up, you could ask your employer (or client if you’re self-employed) for a non-revocable employment contract, which guarantees employment for a specified amount of time. Many lenders will accept a signed contract as proof of income depending on how the start date corresponds with the mortgage completion date.
How can I finance buying a new build?
Buying a new build home can make you higher risk to the lender and the process can be complex for some of the following reasons:
- Developers often work to demanding timescales - once you’ve put down a deposit, you may have only 28 days to exchange contracts with the developer, at which time you’re legally bound to buy the property.
- If buying off-plan, your mortgage offer is likely to be valid for only six months. Some lenders have longer validity periods, while others offer specific new build products.
- The required deposit is typically higher (15% to 25%) for new build flats, than for a new build houses (10% to 20%) because they’re deemed less saleable. This is due to the oversupply of new build property, meaning that many lenders will be more accommodating on new houses than flats.
If you’re struggling to save up for a deposit, you could be eligible for the Help To Buy scheme; a government initiative helping buyers to purchase a new-build home worth up to £600,000, with just a 5% deposit. The government will loan (interest free for the first five years) up to 20% (40% if buying in London). You can repay the loan at any time, without penalty.