The amount you will be able to borrow from a mortgage-lender is dependent on three things – how much you earn, how much the property you want to borrow against is worth and how much the mortgage lender thinks you can afford.
However, do bear in mind that the amount you are able to borrow may not be the same as the amount you can afford to borrow. Many people have been offered mortages that they later find out the hard way are beyond what they can afford to repay.
How much you earn
Unless you have special circumstances a mortgage lender will usually look very closely at what you earn to determine how much you are able to borrow.
Historically the average loan that a mortgage provider would extend to an individual was around 3.5 times there earnings and this is still by far the most common offer.
However, individuals with a strong credit history and a good mortgage broker may be able to borrow up to 4 times their earnings
Therefore an individual earning £25,000 a year could expect to be offered a mortgage of between £87,500 and £100,000.
During the heights of the credit bubble, when mortgage providers were throwing money at borrowers, the multiple increased even further. However, things have now settled down and in normal circumstances you should not expect to be able to borrow much more than 4 times your earnings.
For couples the mortgage provider will take into account your joint income. However, the lender will not usually offer four times this combined amount.
Instead the lender is likely to offer either
2.75 times your combined salary
3.5 times the first salary plus 1 times the second salary
Which offer is larger will depend on the size of the different salaries.
For example a couple earning £25,000 and £15,000 would be able to borrow £110,000 under the first option and £102,500 under the second option.
How much the property is worth
A mortgage lender will typically lend 75% of the value of the property (known as the loan-to-value ratio or LTV ratio). The remaining 25% would therefore have to be funded through your deposit.
In recent years this requirement has become less strict and mortgage lenders now lend anything up to 100% of the value of your property (and even more than 100% in special circumstances).
The global credit crunch means that lenders have become more cautious and the number of 100% loans available has reduced. However, there are still some out there.
Many lenders will still stretch to 90% to 95% of the property’s value. However, for any ratio above 75% you are likely to face a higher interest rate.
In addition to a higher interest rate if you borrow more than 90% of the value of the propert you are likely to have to pay a Higher Lending Fee. Read about why higher lending fees should be avoided if possible .
As well as looking at how much the property is worth a mortgage lender is likely to consider some other details of the property. Perhaps most important is the property’s location – the old adage location, location, location is also true for mortgage lenders who like to be sure that the property you are borrowing against isn’t a dud.
Therefore you may struggle to get a mortgage if the property you have chosen is much more expensive than the average property in the area or even if the property is much less expensive that the average.
How much the lender thinks you will be able to afford
Lenders are increasingly taking into account more than just your income when they decide how much they are willing to lend
Instead many will take into account your unique circumstances using a detailed questionnaire. This could include asking whether you have children or other significant drains or your finances
Some lenders will also estimate your average outgoings by considering your debts and household bills.
First time buyers can sometime struggle to convince lenders they can afford the repayments but can help their chances by showing that they have been paying rent of an equal or greater amount for a sustained period.