Before you take the first step into looking for your dream home, you need to understand how much you may be able to borrow (unless you’re fortunate enough to buy your home outright!) in order to fund it. For the majority of people, becoming a homeowner involves taking out a mortgage. Generally, how much you can borrow will depend on a multitude of things, including the amount you want to borrow in relation to the property’s value, your credit score, your income and your outgoings. We would encourage you to assess your personal finances and see whether it is right for you to be trying to maximise your mortgage – see our free guide ‘Should You Max Out Your Mortgage Borrowing?‘ for help.
Since the Global Financial Crisis in 2008, it has become more challenging to take out a mortgage. Many lenders impose stricter criteria on mortgage applications. These changes were bought into effect by the Financial Conduct Authority in 2014, after a full review of the mortgage market.
As a general guide, mortgage lenders base the amount that you can borrow on a multiple of your income. This is known as the loan-to-income ratio. Most people should be able to take out a mortgage of up to three-five times their annual salary. For a single person who takes home an annual salary of £35,000, the mortgage available could be up to £175,000. The three-five times guide also applies to a partner or spouse of the applicant (if they are also earning), meaning on a combined income of £60,000, you could take out a mortgage together of up to £300,000.
However, it isn’t always as simple as it sounds, and the amount that you can borrow isn’t guaranteed. There are many variables that lenders take into account, and banks want to make sure that if they were to offer someone a mortgage over a length of time, then they are able to keep up their payments. Therefore, banks must assess what level of monthly payments you can afford, and this is evaluated by understanding various personal and living expenses. Banks will also stress test your ability to continue making mortgage payments in life events such as redundancy, changing your career, and so on. This is known as an affordability assessment. After a lender has finished their assessment, the outcome may result in them offering you a much lower amount than you initially hoped for.
So, what can you do to increase how much you can borrow and ensure you prepare your financial situation in the event of a mortgage application? We have outlined some very important steps below, which you can consider to help you take the next step in maximising how much you can borrow.
Increase your income
Thinking about how to grow your income to help you work towards the amount you need to borrow for that dream home you’ve found, should be top of your list.
You could grow your earnings by asking for a pay rise or seeking additional work outside of your full-time job. If some part-time freelance work, or a weekend job in your local pub, can increase your income by an additional £5,000, for example, you could go from being able to borrow up to £175,000 on a £35,000 p/a salary, to up to £200,000 on a £40,000 p/a salary. This could make a big difference in the type of property you can purchase.
Something to bear in mind if you are self-employed. It can be more difficult to get on the property ladder if this is your sole source of income. Bank lenders often want to see you jump through a few more hoops to prove your earnings over the last few years, sometimes even up to 3 years. They will look at profits, losses, income, expenses, invoices and more, so you may need to be a little more prepared for when the time comes. We highly recommend speaking to a Mortgage Adviser for guidance.
Settle your debts
Settling any outstanding debts or credit card balances will be looked upon favourably by lenders. You should consider paying these off before you start house hunting.
Not only will this prove to banks that you can be trusted to handle any debts responsibly, but it will also help to improve your credit score, supporting your application further.
Watch what your spending
As part of the application process, banks will examine your outgoings with a fine-tooth comb. So, if you are needlessly spending money on things you do not use or even want, now is the time to rethink your habits.
Remember earlier when we mentioned stress testing? Well, lenders will stress test your finances to see if you can keep up mortgage payments on top of regular outgoings. By cutting back on unnecessary spending now, and allowing for a little more breathing space between your income and outgoings, will help to strengthen your application.
Improve your credit rating
The better your credit rating, the more lenders are likely to lend you. There are many ways to improve your credit rating record, including registering on the electoral roll, building credit history, making regular payments and keeping up with bills.
Having the best possible rating means you’ll have a better chance of approval for a mortgage, providing you with more flexibility, and you may be able to choose from a wider range of products through different providers. You can check your credit score through a selection of various providers, including Experian and Equifax.
Consider outside help
In some cases, you may be able to consider a JBSPM (Joint Borrower Sole Proprietor Mortgage). This means you can take out a mortgage with your parents or someone else (usually another family member) willing to have joint responsibility for the mortgage payments, but only you actually own the property. This consideration helps those on a lower income have support in their application, increase the chances of getting a mortgage, and maximise what they can borrow.
However, this does come with risk, and having a JBSPM means all involved become jointly liable for the mortgage. If, at any point, any of those involved cannot keep up with the payments, then whoever is responsible will need to continue the payments.
A guarantor mortgage is also another option and will help improve your chances of being accepted or able to borrow more. In this instance, a guarantor mortgage is a home loan where a parent or close family member takes on the risk of the mortgage. This usually involves them offering their home or savings as security against the loan, and agreeing to cover the mortgage payments if the homeowner misses a payment. An advantage of this is that guarantor deals might help you get a mortgage or borrow more. The downside, however, is that the guarantor could be liable for any shortfall if the property is repossessed and sold.
So, the best options to increase how much you can borrow on a mortgage will involve careful planning, finding ways to grow your income, paying off any unsettled debts, watching and regularly reviewing your monthly spending.
Your home may be repossessed if you do not keep up repayments on your mortgage.