Buying a home but not sure how much you can borrow? You’re not alone. It’s one of the most common questions asked at the start of the mortgage process.

While there’s only one way to find out exactly how much you can borrow (by applying to a lender and going through their affordability assessment) ), there are a few guidelines you can follow to arrive at a good estimate. Calculators at the ready!

How much mortgage can I borrow?

Generally speaking, there are three things lenders will use to decide how much you can borrow:

  1. Your loan-to-income ratio
  2. An affordability assessment
  3. A stress test

Your loan-to-income ratio 

To work out how much you can afford, lenders do a simple calculation based on a multiple of your income. It’s known as your loan-to-income ratio. These days, it’s usually capped at 4.5 times your annual income.     

Example: If your household income is £60,000 annually, you could likely borrow up to a maximum of £270,000 (that’s a 4.5 loan-to-income ratio). Likewise, if you’re making £25,000, your max mortgage amount is probably £112,500. (Keep in mind that being able to borrow up to your maximum amount depends on lots of factors – your income, outgoings, credit history, employment situation, and more.)

An affordability assessment 

Next, lenders will look at your outgoings, with 3 main things in mind:

  • Repayments, such as credit card payments, loans, or other debts.
  • Essential expenses, like council tax, utilities, food, and commuting to work.
  • Costs for a basic quality of living. This includes minimum leisure costs, childcare, furniture, and repairs. 

Lenders won’t want to lend more than they think you can repay each month. So, if your outgoings have been high in recent months — for example, you’ve bought a new car — you may not be able to borrow as much as you thought.

A stress test 

Finally, a lender will want to know if you can keep up with repayments if your circumstances, or mortgage interest rates in general, change. This is called a mortgage stress test. They’ll look at your mortgage affordability (i.e. how much you can comfortably afford to borrow) if:

  • Mortgage interest rates go up, or
  • You have a change in circumstances (like having a baby, taking a career break, or being made redundant)

If a lender thinks you’d be unable to make your repayments when faced with one or more of those scenarios, they could limit the amount they’re willing to lend. 

Note: With these criteria in mind, it’s often a good idea to keep a bit of a buffer between the maximum you can afford to borrow and what you ask for. This should help you smash the stress test with ease.

Things that could mean you might be able to borrow more:

Sometimes you can borrow more if you fit some specific criteria. However, since 2020, lots of lenders who allowed people in these cases to borrow more have changed their rules, so check with them or your broker first:

  • You’re a professional. Some lenders might offer professionals, like doctors or dentists,  more than the usual 4.5 loan-to-income ratio.

  • You have a high household income. If you earn more than £80,000, you can sometimes borrow larger amounts.

  • You have a larger deposit. Again, this depends on the lender, but they may be happy to lend more if you have more equity or a bigger down payment (think 25% or more).

I’m self-employed: how much mortgage can I get?

If you’re self-employed, you should be able to borrow the same amount as those who are full-time employees. However, as a sole trader, contractor, freelancer, or entrepreneur, you’ll probably have to jump through a few more hoops to prove your income. 

As part of your affordability checks, you’ll need to supply:

  • Your self-assessment and business tax returns
  • Any limited company accounts
  • Any part-time employment contracts

Strictly speaking, the same affordability rules and loan-to-income calculations apply. But, to prove your income, a year of payslips won’t cut it. Lenders usually want to see your average income over the past 2 to 3 years.  That said, if you've been self-employed for less than 2 years, there are some lenders who are happy to take one year of self-employed income (like Habito!).

Meanwhile, if your income has shown signs of growing, lenders will likely see this as a good sign. But they’ll want to be sure you can expect to earn the same amount in the coming years, so any contracts showing upcoming work can help convince them.

I’m retired: what can I borrow?

For retired people, the amount you can borrow will still depend on your incomings and outgoings. That means making sure your pension pot, your workplace pension, or your investments can cover the costs of a mortgage.

However, lenders tend to be a little more hesitant when lending to people who are retired or soon-to-be-retired. That’s because you’re less likely to have a regular income.

Buy-to-let mortgages: how much can I borrow?

The amount you can borrow on a buy-to-let (BTL) mortgage works a little differently from their residential counterparts. Alongside the normal affordability criteria, you’ll need to consider:

  • You’ll need a larger deposit. BTL mortgages are considered a little riskier for lenders, which means you’ll usually need at least a 25% deposit, if not more. You should expect to borrow 60-75% of the value of the property.

    Example: If you’re looking at a property worth £200,000, you’ll be able to borrow from £120,000 (40% deposit) to £150,000 (25% deposit).
  • You’ll need a larger deposit. BTL mortgages are considered a little riskier for lenders, which means you’ll usually need at least a 25% deposit, if not more. You should expect to borrow 60-75% of the value of the property.
  • Most buy-to-let mortgages are interest-only. It’s an important point to bear in mind, as you’ll need to be able to pay back the whole borrowed amount at the end of the term. To tell you how much you can borrow, lenders will want to see a repayment plan – namely a portfolio of investments or savings that are likely to mature.
  • What you can borrow will depend on your expected rental income. BTL mortgages are mortgages on properties you’ll rent out,so the amount you’ll rent for has a big impact. Usually, the income you get from renting should be 25% more than your monthly repayments. This should be enough to cover any of the other costs associated with the property – like maintenance – as well as tax on the rental income.

    Example: If you can expect £1,000 a month from your property, that means your maximum monthly mortgage repayment would be around £800 (or £9,600 annually). On a 5% interest-only mortgage, that adds up to a £192,000 total.

You can read more about buy-to-let mortgages here.

A mortgage in principle can tell you how much you could borrow

Want a personalised assessment of how much you can borrow? Get a mortgage in principle (MIP). An MIP is a certificate from a lender or broker that tells you how much you could borrow based on your circumstances. 

An MIP gives you clarity on what you can afford, and gives you a bit more credibility when you make an offer on a home. While it doesn’t guarantee what you’ll be able to borrow (you can only know that through a full affordability check), it can show that you have your financial ducks in a row. And the best bit? It’s free and takes only a few minutes. No credit check necessary.  Get started with an MiP here, or use our mortgage calculator to get a rough idea first.