In the current climate of rising interest and mortgage rates, many landlords and homeowners will be considering their options. When it comes to obtaining or renewing a mortgage, it is vital that you are aware of how much you can borrow. You will need to think about your banks’ considerations when assessing an application. Indeed, often the first question buyers may ask themselves is: how much do banks lend for a mortgage?
We are here to answer that question. This blog will explore how the amount one can borrow can fluctuate depending on the lender, your own financial situation, and the type of mortgage you’re going for.
How does an affordability assessment work?
In the UK, banks are required to conduct affordability assessments before delivering a mortgage. This ensures the borrower can afford the loan repayments.
Lenders will review your income to determine its stability and suitability for the mortgage. They will consider various sources of income, such as employment income, self-employment earnings or rental income from buy-to-let properties. The lender will typically request documents, such as payslips, bank statements, tax returns, and employment contracts, to verify this.
Lenders will then assess your monthly outgoings including household bills, loan repayments, credit card payments, childcare costs, and other financial commitments. This helps them understand your existing financial obligations and your ability to manage your future mortgage repayments.
Next, your lender will calculate your existing debt-to-income ratio (DTI) by comparing your total monthly debt payments (including the estimated mortgage payment) to your gross monthly income. This ratio helps the lender determine your ability to handle the additional mortgage debt. Generally, lenders prefer the DTI to be below a certain threshold, typically between 20%-29%.
Source: The Mortgage Hut
How much do banks lend for mortgages for your LTI ratio?
Your loan-to-income (LTI) ratio will have a big impact on how much banks lend for mortgages. LTI measures the proportion of the loan amount relative to your annual income. The UK’s regulatory framework generally caps the LTI at 4.5 times your annual income for the majority of mortgage applications.
As such, with this typical cap in mind, borrowers will typically be able to borrow the following amounts relative to whatever your salary is:
|Typical amount that you can borrow
Source: Property Reporter
What is the highest amount you can borrow?
The highest amount a person can borrow depends on several factors, not just their income. This includes creditworthiness and the type of mortgage they are applying for.
Some banks might allow you to take out a mortgage with a higher LTI ratio, particularly if you have an unusual credit history or income profile. The amount that you can borrow can also be influenced by the value of the property, or the deposit that you can put down, as well as the lender’s own lending criteria.
Some lenders will stretch to five times a borrower’s income, or more. Others may only allow four times a person’s income. It is worth remembering, however, that even a slight difference can significantly increase the size of a loan. For instance, if you earn £40,000 a year and take out a loan that is five times your salary rather than 4.5 times, the size of the loan would jump by an additional £20,000.
If you are seeking to take out a mortgage that is worth more than 4.5 times your salary, it is worth speaking to a broker to ensure you can secure the right financial product for your needs.
Source: Mortgage Strategy
What is the lowest amount banks lend for mortgages?
In terms of the lowest amount that you can borrow, it again depends on a lender’s policies and the specific details of your application – but most lenders will have a minimum mortgage amount that they are willing to provide.
Typically, the minimum that you can borrow falls between £20,000 and £50,000.
Source: Online Mortgage Advisor
Does the amount differ per mortgage type or borrower type?
In short, yes. For fixed-rate mortgages, the criteria that we have explored already is quite standard across most high-street banks and mainstream lenders in the UK.
For buy-to-let mortgages, however, banks will assess your rental income potential alongside your salary to determine what your borrowing limit will be. Therefore, you can often borrow more money if you are getting a buy-to-let mortgage.
When it comes to borrower type, you will find that there are also variations on the amount that you can borrow. If you are a first-time buyer, for instance, you may be able to access mortgage products or schemes that are designed for those moving onto the property ladder. As such, higher borrowing limits or more favourable repayment terms may be available to you.
If you are self-employed, you might face closer scrutiny from your bank, and may have to provide additional documentation to prove income. Lenders will then make an assessment based on your income, the stability of your earnings and your creditworthiness. The amounts and terms available to the self-employed may be different to what’s available to those who work a 9-5.
How much do banks lend for mortgages to those with adverse credit?
If you have a poor credit history, you may be perceived as higher risk by lenders. This can impact the amount you can borrow, and the terms offered.
In truth, each lender will have its own criteria when it comes to dealing with borrowers with adverse credit. However, they will generally offer higher interest rates on a mortgage, and the amount that you can borrow will typically be lower to reduce risk to the lender. They might also ask for a higher deposit of between 20% and 25%, rather than 5% or 10%.
If you can provide evidence of a good repayment history since your credit score had been impacted in the past, this may help ease lenders concerns as well.
How much can you borrow without any savings?
You not only need to consider how much do banks lend for mortgages, but also whether they’ll consider those with limited assets at all. In the UK, it can be challenging to secure a mortgage without any savings, as most lenders typically require a deposit to be provided by the borrower.
However, there are a few options available for those without significant savings.
For instance, 100% mortgages have recently come back onto the market. However, you must have a strong credit history, stable income, and demonstrate the ability to afford mortgage repayments without relying solely on the value of the property.
Another option is to take out a guarantor mortgage, where a family member can provide additional security to the lender, allowing you to access higher loan-to-value (LTV) ratios. In this case, the financial history of your guarantor will also be taken into consideration.
Source: The Guardian
What makes specialist finance different?
Specialist lenders often have more flexible lending criteria for borrowers with impaired credit histories or complex financial circumstances. These lenders understand the challenges faced by borrowers and may be more willing to consider an application that traditional high-street lenders would quickly decline.
At MFS, for example, we employ a more personalised and flexible underwriting approach. This allows us to focus on assessing your individual circumstances, rather than solely relying on credit scores or standard affordability metrics like many high street banks.
This means that we can take on applications that other lenders might shy away from and potentially provide finance even if you have the most complex of financial histories.
To find out more about how much you can borrow at MFS, check out our mortgage calculator.