Is it harder to get a mortgage on a low income? Yes, it can be more difficult to find a lender and you’ll probably have less choice when it comes to the mortgage deal you get. But is it impossible? Absolutely not. And, with the right preparation (and the right expert help from a mortgage broker like Habito), you should be able to own your own home, even if you’re on a lower income.
What counts as a low income in the UK?
Although the term sounds quite vague, there is an equation to decide whether people in the UK are on a low income.
For the official statistics, the government samples data from 20,000 households spread across the country. They then find the median income for those households, and you’re classified as a ‘low-income household’ if you make less than 60% of this figure.
The latest median income for households with no children is £29,000. This would mean that households that take home less than £17,400 a year are on a low income.
What about individual people? The median income for individuals employed in the UK is £2,010 a month (which works out at £24,120 a year). 60% of this figure is £1,206 a month so, statistically, a working person has a low income if they make less than £14,472 a year. This is quite similar to the amount you’d make working full time on the national minimum wage.
How much can you borrow on a low income?
The standard amount you can borrow for a mortgage loan is 4.5 times your annual salary. If you have an annual income of about £14,000, you’d theoretically be able to borrow £63,000.
When you consider that the average price of a home in 2021 was over £260,000 and property prices are still rising, this seems like a small amount. But don’t lose hope, because there are some things that can make your home loan go further (more on those below).
What deposit do you need to get a mortgage with a low income?
One of the biggest obstacles to buying a house or flat on a low income is that it’s much harder to save for your home deposit if you have less left over at the end of the month.
The good news is that you should still have options for getting a mortgage with a smaller deposit, thanks to the Mortgage Guarantee Scheme, which exists to encourage banks to lend up to 95% of the purchase price.
With this scheme, the government acts as a guarantor of the mortgages, which makes it less risky for lenders to lend. In the worst-case scenario, if you weren’t able to keep up your mortgage repayments, lenders wouldn’t lose all the money that they let you borrow, because the government has backed them up.
Where the standard house deposit is usually around 10%, saving a 5% deposit and borrowing 95% of the purchase price can be much more achievable. A £180,000 flat, for example, would then need as little as £9,000 in savings for a deposit rather than £18,000.
What can help you get a mortgage on a low income?
Part of the problem of getting on the housing ladder when you have a low income is that, while you’re patiently saving up, life keeps moving forward. Maybe you can afford a small property in certain areas, but you need more bedrooms, some office space, or to be within commuting distance of your job.
Thankfully, there are options that can help you to afford the home you actually need.
Including benefits in your income
If you receive benefits (including Universal Credit), you can give a potential mortgage lender evidence of your payments in the same way you’d submit payslips to prove your income from your job. Just be aware that not all mortgage lenders are happy to count benefits as additional income. For mortgage advice and help finding a specialist lender that does, we at Habito can help.
Help to Buy Schemes
Right now in the UK, there are some great options to help you get on the property ladder, especially for new build homes and first-time buyers. Some schemes will also give priority to people on a low income as the properties are released.
The schemes to know about are The Help to Buy Equity Loan, Shared Ownership, and Rent to Buy.
- The Help to Buy Equity Loan (or Homebuy, in Wales) allows you to borrow money to buy a property. It’s a 25 year loan that’s interest-free for the first five years. After that, you’ll only have to pay off the interest each month, until you either sell your home or the 25 years pass.
- When you buy a shared ownership property, you own a share of the house (usually between 25% and 75%) and a housing association or your local council owns the rest. You’ll have to get a mortgage for the amount that you own (so, if you buy 30% of a £220,000 house, a mortgage for £66,000 – which should be doable on the ‘official’ low income we mentioned at the beginning of this post). You’ll also have to pay rent on the share of the property you don’t own.
- In a Rent to Buy scheme, you’ll agree to rent a property for a certain amount of time (usually 5 years) at a slightly reduced rent (usually 20% less than the local average). While you’re a tenant, you’re expected to save the money you’re not spending on rent and, at the end of the contract, you use that money to pay a bigger deposit on the house or flat you’ve been living in.
How can you improve your chances of getting a low-income mortgage?
Not all lenders offer mortgages for people on a low income. And unfortunately, the ones that do will usually save their best mortgage deals, with the lower repayments and interest rates, for people with a high income, or people whose jobs mean that their salary will rise as they move up a clearly defined career ladder (like people who work in healthcare).
But again, that doesn’t mean you’re powerless. Here are a few things you can do to help:
1. Improve your credit rating
You can improve your chances of getting not just a mortgage, but a good deal, by improving your credit score before you make your mortgage application.
Focus on clearing any debts that you have, paying off your overdraft, cancelling credit cards you don’t use, and try not to take out any new loans in the months before you apply. Serious black marks, such as CCJs, will also be cleared from your credit score after six years, so it may help to wait.
2. Get help from family
There are various types of mortgages that let you lean on family support. With a guarantor mortgage, a family member agrees to cover your mortgage payments if you can’t. And a family offset mortgage links your mortgage loan to their savings to reduce the amount of loan that you pay interest on.
More in our guide: the different types of mortgages
3. Save as much as you can
Having a large deposit relative to the size of your mortgage will open up better deals. If you can get a deal with a lower rate of mortgage interest, you’ll end up saving money in the long run. There are a couple of things worth knowing here:
- First, some lenders allow you to use a cash gift to help you get a bigger deposit together. You won’t be allowed to use a gift to cover your whole deposit, and the person giving you financial help will have to sign a legal document stating that they don’t expect the money back, but it can significantly increase the amount of money you’re able to put down.
- Second, you can use a Lifetime Individual Savings Account (also known as a lifetime ISA or a LISA) to help to supercharge your savings. If you’re a UK taxpayer aged between 18 and 39, you can open one of these accounts to save for your first home. Every year, the government will add 25% to any money you put in this bank account. You can save up to £4000 a year (and get up to a £1,000 bonus), and you won’t have to pay tax on your interest.
4. Ask an expert
When you have special circumstances that might affect your chances of getting a mortgage, one of the best things you can do is contact a mortgage broker to find out what options are open to you. As a whole-of-market broker, Habito can search over 20,000 mortgage deals from over 90 lenders to find the best deal for you, whatever your income.