The average deposit percentage for UK first-time buyers was 21% in 2022, meaning they would have to take out the remaining 79% as a mortgage. (source)
However, not everyone might be eligible to get a mortgage for this amount. So, the question becomes: how much mortgage can I get on my salary?
The amount of mortgage you can afford depends heavily on your income and financial situation, so it's important to understand the relationship between salary and mortgage affordability.
In this guide, we'll break down the factors that determine how much mortgage you can get on your salary and provide some tips to help you make a well-informed decision.
6 Important Factors That Affect How Much Mortgage You Can Get
Before getting into specifics, it's important to understand the key factors that affect mortgage affordability. These include:
Your income is the main factor that determines how much mortgage you can afford. Lenders typically use a guideline called the debt-to-income (DTI) ratio to determine how much of your monthly income can go toward your mortgage payment.
The lower your DTI, the more mortgage you can afford.
Your credit score is another important factor that lenders consider when determining your mortgage affordability. A higher credit score generally means you'll qualify for a lower interest rate, which can save you thousands of dollars throughout your mortgage.
It's important to maintain a good credit score and avoid any negative marks on your credit report if you want to get the best mortgage possible.
Aside from your income and credit score, lenders will also look at any other outstanding debts you have. This includes things like car loans, student loans, and credit card debt.
These debts can decrease the amount of mortgage you can afford because they are factored into your DTI ratio. The more debt you have, the lower your DTI and the less mortgage you can qualify for.
The current interest rates also play a significant role in determining mortgage affordability. A lower interest rate means you can borrow more money for the same monthly payment, resulting in a higher mortgage amount that you can afford.
On the other hand, a higher interest rate will decrease the amount of mortgage you can afford as it increases your monthly payment.
Lenders may also consider your employment history when determining your mortgage affordability. They want to see that you have a stable job with a consistent income to ensure that you can make timely mortgage payments.
If you have a history of job hopping or irregular income, this may raise red flags for lenders and affect the amount of mortgage you can afford.
How to Calculate Possible Mortgage Based on Salary?
Generally, when applying for a loan, the amount you can borrow is often calculated based on a multiple of your annual income. The specific multiple can vary depending on your earnings.
Let's break it down:
- If you earn less than £30,000 a year, you can typically borrow up to 4.5 times your annual income. For example, if you earn £25,000, you may be eligible to borrow up to £112,500 (£25,000 x 4.5).
- If you earn more than £30,000 a year, the borrowing multiple can increase. You might be able to borrow up to 6 times your annual income. For instance, if you earn £40,000, you could potentially borrow up to £240,000 (£40,000 x 6).
These are rough figure estimates and may vary depending on your financial circumstances. It's always best to consult with a mortgage advisor to get a more accurate estimate of the amount you can borrow.
In addition to income, your expenses also play a significant role in determining how much mortgage you can afford.
Lenders will consider your monthly debt payments, such as credit card bills and car loans when calculating affordability. Ideally, these payments should not exceed 36% of your gross monthly income.
Another factor to consider is your down payment or loan-to-value (LTV) ratio. It is an essential factor in mortgage lending.
For example, suppose you want to purchase a house that costs £200,000 and you have £40,000 for a down payment. You would need a mortgage of £160,000. The LTV ratio in this case would be 80% (£160,000 / £200,000).
This means you have a 20% equity stake in the property. An LTV of 80% or less is generally considered good and can lead to more favorable loan terms.
Practical Tips to Increase Your Mortgage Affordability
Once you understand the key factors that determine how much mortgage you can afford, there are several practical tips you can follow to maximize your affordability:
- Save for a larger down payment: The more money you put down, the less you need to borrow. This means a lower LTV ratio and potentially better loan terms.
- Reduce your debt-to-income ratio: You can do this by paying off outstanding debts or increasing your income. This will improve your affordability and increase the amount you can borrow.
- Improve your credit score: A higher credit score can help you qualify for a lower interest rate, which means lower monthly mortgage payments.
- Consider joint ownership with a partner or family member: By pooling resources, you may be able to afford a larger down payment and potentially secure a larger mortgage.
- Choose a longer repayment term: A longer mortgage term may result in lower monthly payments, making the loan more affordable. However, keep in mind that this will also mean paying more interest over the life of the loan.
By following these practical tips, you can increase your mortgage affordability and potentially qualify for a larger loan amount or secure better loan terms.