How Much Can You Borrow? A Guide to Calculating Your Mortgage in the UK

The price of properties in the UK has always been a problem for many would-be owners. In most cases, you won’t have enough on your bank account to pay for one parcel of real estate here.

Fortunately, there is always the option to get the funds yourself through a mortgage. But this does lead you to asking the question: how much mortgage can I get in the UK?

But here is one more important question that you need to answer:

How much mortgage can I afford?

To answer these questions in one sitting, you need to understand a few concepts.

What is a Mortgage?

A mortgage is simply a loan offered to you to purchase property or sizeable parcels of land. These are long-term loans since the lender wants to profit from their contract with you for as long as possible.

To motivate you in repaying what you owe, the loan will be secured against the property you will purchase. This means that if you can’t pay off the loan, the lending company can repossess the property and sell it to someone else. This way, the lender can at least get back a portion of the amount that they loaned to you.

Where to Get a Mortgage

Aside from asking “how much of a mortgage can I get?”, you should also consider where you would get it. Fortunately, there are quite a lot of financial lending institutions in the country where you could apply for a mortgage at.

If you want to make things easier and do not mind paying for extra, you can also avail of the services of an Independent Financial Advisor who could find and compare different mortgage plans available for you in the market.

Regardless of what route you will take, it is expected that you know of the following before you consider getting a mortgage:

• The kind of mortgage that you need or want.
• The property that you want to buy.
• How much you want to borrow.
• How long you want to pay for it.
• The interest rate that you can manage.

In some cases, the lender will ask if you have sought the help of an IFA. This is because they would rather want to know how well you are aware of the consequences of signing up for a mortgage.

Applying for a Mortgage

Regardless of where you get your mortgage at, applying for one is always a two-step process.

Phase 1: Investigation

In this part, the lender would ask a series of general questions to know who you are. They would generally ask what is the reason why you are applying for a mortgage and the payment terms that you are comfortable with.

They would also try to look into your current financial situation. This is just to get an idea as to what you are really looking for and how much money they are willing to lend you.

Phase 2: Application

At this point of the process, you will have to fill up an application form. At the same time, the lender is going to conduct a full-on investigation on you. This is to find out how much of a risk you will pose to them as a borrower.

To do this, they will have to go over your financial records .The lender would want to know whether or not you have been faithful to any previous financial obligation.

Lenders would also look into your financial stability over the duration of the loan. Keep in mind that rates do increase due to outside factors and your ability to pay for the mortgage may not be the same within half a decade or so.

If your application is accepted, lenders will give you a “reflection period” which lasts for 7 days or more. This will give you enough time to consider other options.

Why Deposit Size Matters

Aside from asking how much of a mortgage I can get in the UK, you should also consider your deposit. This will act as your part in contributing to the overall cost of purchasing the property.

One advantage comes in the form of Loan to Value or LTV. This is the amount of your home that was loaned from the mortgage compared to the amount that came straight from you.

Supposed that you were to buy a house at £250,000. How much of that comes from your own pocket? If the amount you deposited is £75,000, then that means that you own 30% of your house. The 70% will be your LTV and the mortgage will be secured for that.

The beauty with LTVs is that they are directly proportional to your interest rate. Usually, interest rates are their lowest when the LTV reaches the 40% margin in the UK.

How Your Credit Score could Affect your Mortgage

When you think about it, the mortgage is a trust given to you by the lender. If you are trustworthy, the lender will not hesitate on approving your loan application.

Your credit score will prove just how trustworthy you are as a mortgagee. A higher credit score would result in a faster approval of your mortgage as well as a higher loan. On the contrary, low credit scores could result in fewer mortgaging options.

Improving your Credit Score

Here’s a quick run-down of what you could do to improve your credit ratings:

Check Your Credit File

The three major credit reporting agencies (TransUnion, Equifax, and Experian) can offer you a copy of your credit report for a small fee. Check everything there if they are correct. Also, take note what factors have affected your rating the most.

Register to Vote

By registering to vote, you give some sense of permanency in your address. After all, you can’t vote in some place unless you have stayed there for a handful of years.

Mind Your Credit Cards

Have a quick inventory of your credit cards and find out which ones are unused and redundant. Have them then closed in order to boost your rating in the next report. Your credit cards must also be linked to your most present address so as to make the verification process easier.

Pay on Time

Your credit score tends to be more favorable the more consistent and prompt you are on paying your dues. Those that do negatively impact your score are payments that are late, missed, or defaulted.

As such, it would be best that you stay in contact with your providers regarding your payments and even if you are struggling. A pattern of consistent payments will eventually lead to a better credit score

Save Often

In conjunction with the tip above, you should have a sizeable amount of money stored just in case your regular income is not enough to meet your monthly expenses. This way, you have something to pay for your dues which improves on your score.

Also, this helps you save enough money to contribute to the purchase of the property which improves on the LTV of your mortgage.

Income

Usually, mortgage lenders will apply a multiple based on your income to determine how much you can get from them.

So, if you apply a lender who uses a 4x multiple on income and you earn £50,000 per year, that means that you could get a loan for as high as £200,000 out of that lender. Of course, the final amount depends greatly on the multiple that they use as well as some other factors.

The best way to take full advantage of the multiple is to add extra sources of income on your application. So if you were to earn £50,000 from your work and £20,000 from a business, the latter amount might be added to the former. So, the equation would be £50,000 x 4 + £20,000 = £220,000.

Considerations on Income

Just keep in mind that a lot of lenders now use income multiples in determining the maximum amount that they are going to lend to you as well as some other stringent affordability assessment processes.

For compensation income, the multiple will only cover your basic rate. Lenders would generally exclude other payments like night shift differentials, overtime pay, and holiday pay.

In addition, the amount of income that you will declare will have to be proven through pay slips, contracts, income statements, and other financial records.

As such, aside from asking yourself how much mortgage can I get, you should also make sure that you leave a good impression by way of your yearly income statements.

Can I Borrow More than my Current Salary?

“So, in determining how much mortgage can I get, can I possibly secure an amount 5 times or more than my current salary” You ask yourself. The answer is Yes.

You will find out that there are some lenders out there who are generous enough to allow you to borrow more than £200,000 in mortgages with interest rates that are comparatively manageable.

The only downside are the more demanding requirements. In fact, there are two ways that your application for this kind of mortgage can get rejected. First is if you cannot deposit more than 10% of the value of the property. The second is if you have not been earning more than £150,000 for the past few years.

Repayment terms for these of mortgages are longer. Some could go up to 30 years which is long enough given that your financial status could change within only a few years to half a decade. However, such mortgages do have more manageable repayment rates.

Costs

What about the amount of money that leaves your wallet on a regular basis? Expenses and other outgoing money entries are perhaps two of the biggest considerations lenders look into when you apply for a loan.

Here are the costs that a lender would look into when investigating you:

• Other financial obligations like loans and credit card payments.
• Council taxes.
• Domestic utility expenses like rent, electricity, water.
• Insurances like life, building, and unemployment.
• Motor expenses like repairs, insurance, and tax (provided that you own a vehicle, of course).
• Family expenses like tuition for children, child maintenance expenses, and others.

For some lenders, they might even include a reduction depending on the number of children and dependents that you have. Others have also taken expenses like discretionary costs into account.

Lastly, lenders would have to ask for an assurance that you have the means to keep up with repayments regardless of any increase in rates as well as outside economic factors.

As such, it is recommended that you reduce your spending before you apply for any mortgage.

Some Other Things to Consider

“So how much mortgage Can I get in the UK?” You ask yourself for the last time now. The answer depends greatly on your earnings and your ability to manage repayment.

However, there are some other factors that you should also look into when it comes to mortgages.

Being Stuck in the Same Job Helps

What a lot of lenders are looking for is job security. This will tell them that an applicant has the means to keep up with repayment terms.

As such, even if your career has seen no movement for a while, being stuck in a stable job for years on end might just increase your chances of getting a higher mortgage amount.

Consider a Joint Application

There is always the option to buy the property with someone else. Another mortgagee can boost your chances of securing a large mortgage. This can even help you if your co-applicant has a sizeable source of income and a good credit score.

However, this is a rather big commitment. If you apply for a mortgage with someone else, both of you will be solidarily liable for the entire amount. That means that the lender can go after either of you in case you default on your payments.

Never Edit as You Please

Once you have started applying for a mortgage, don’t go back and change some figures. Not only will this delay your application for quite a bit but it also leaves a bad impression on you to the lender. As such, it is best that you make sure that everything in your application form is correct and you commit to those facts as stated.

But if you do have to change something in your application form, you need to contact the lender as quickly as possible and give them a reasonable explanation. This will prevent any unnecessary delay and ensure that you get your loan as quickly as possible.