Are you dreaming of owning your first home?
Securing a mortgage is a significant step towards owning a home, and understanding how to maximise the amount you can borrow will help you achieve your dream property.
In the UK, the amount you can borrow is influenced by several factors including your income, deposit, and financial health.
This article provides a comprehensive guide on how these factors work and offers practical tips to increase the amount you can borrow for a mortgage.
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Average Deposits and Mortgage
When it comes to securing a mortgage, your deposit plays a crucial role. The larger your deposit, the smaller the mortgage you need and the better the terms you can usually secure.
The average deposit for first-time buyers in the UK is around 5%-15% of the property’s value.
Lenders often require at least a 5% deposit, but a higher deposit—such as 10%, 15%, or even 20%—can significantly improve your borrowing potential and reduce your interest rates.
For example, if you’re purchasing a £300,000 property, a 5% deposit would be £15,000, leaving you needing a £285,000 mortgage.
However, if you manage a 20% deposit (£60,000), you only require a £240,000 mortgage. Higher deposits reduce the loan-to-value (LTV) ratio, making you a less risky proposition for lenders and increasing your chances of borrowing more.
How Much Can I Borrow With a Mortgage?
In the UK, lenders typically use an income multiplier to determine how much they are willing to lend. This multiplier is generally between 4 and 4.5 times your annual income
Lenders typically use an affordability assessment to determine this amount, considering your monthly income and outgoings to establish how much you can comfortably afford to repay.
Your income is the primary factor in determining your borrowing capacity. Lenders usually offer loans up to four and a half times your annual salary.
For example, if you earn £50,000 per year, you might be able to borrow up to £225,000.
However, lenders also consider other factors such as your credit score, existing debts, living expenses, and the type of property you wish to buy. These elements collectively influence the final amount you can borrow.
How To Increase The Amount You Can Borrow For A Mortgage in the UK (7 Tips)
1. Check and Improve Your Credit Score
Your credit score is a critical factor that lenders consider when assessing your mortgage application. A higher credit score indicates that you are a reliable borrower, which can increase your borrowing potential.
Start by checking your credit report for any errors or discrepancies and address them promptly. Ensure that you pay your bills on time, reduce outstanding debts, and avoid applying for new credit in the months leading up to your mortgage application.
2. Increase Your Income
Boosting your income is another effective way to enhance your borrowing capacity. This can be achieved through various means such as requesting a raise at work, taking on additional part-time jobs, or exploring freelance opportunities. The higher your income, the more you can borrow, as lenders will see you as more capable of repaying the loan.
Provide proof of regular bonuses or commissions to your lender, as these can often be included in your total income.
3. Reduce Your Debts
High levels of existing debt can negatively impact your borrowing potential. Lenders look at your debt-to-income ratio to ensure you can manage additional mortgage repayments.
Reducing or clearing debts such as personal loans, credit card balances, or car finance will improve this ratio and increase your borrowing limit. Budgeting effectively and prioritising debt repayment can make a substantial difference.
4. Reduce Your Outgoings
Lenders assess your monthly outgoings to determine how much you can afford to repay each month. By reducing your monthly expenses, you can improve your affordability assessment.
Create a budget and identify areas where you can cut back, such as dining out, subscriptions, or unnecessary purchases. Demonstrating a lower level of expenditure can increase your borrowing potential.
5. Save for a Larger Deposit
As mentioned earlier, a larger deposit reduces the risk to the lender by lowering the LTV ratio. Saving more for your deposit can significantly increase the amount you can borrow. Consider the following methods to boost your savings:
- Set up a dedicated savings account with competitive interest rates.
- Cut unnecessary expenses and create a strict budget.
- Use government schemes like the Lifetime ISA, which offers a bonus on your savings.
- Seek financial gifts or loans from family members.
6. Consider Adding a Co-Applicant
Adding another applicant to your mortgage application can significantly increase your borrowing capacity. Lenders will consider both incomes when determining the loan amount, which can result in a higher combined borrowing potential.
For instance, if your annual salary is £50,000, you might be able to borrow between £200,000 and £225,000. If you’re applying for a joint mortgage with a partner earning £30,000 annually, the combined income of £80,000 could allow you to borrow between £320,000 and £360,000.
This is particularly beneficial for first-time buyers or couples looking to purchase a property together. Ensure that the co-applicant also has a good credit history and stable income to maximize your chances of approval.
7. Opt for a Longer Mortgage Term
Extending the term of your mortgage can reduce your monthly repayments, making it easier to afford a larger loan.
While this means you’ll pay more interest over the life of the loan, it can help you secure the property you desire.
Discuss with your lender the possibility of opting for a 30-year mortgage term instead of the standard 25 years.
