How Much Can I Borrow?

When calculating how much it is willing to lend you, a mortgage provider will first look at your income. This is usually your gross basic salary before tax and deductions. Lenders may also take into consideration any overtime, commission and bonuses which you are guaranteed to receive but they will usually require proof of that additional income from your employer.

As a rule of thumb, if you are a single applicant mortgage providers will lend around three to three-and-a-half times your annual income. If your application is a joint one, then the amount you will be able to borrow is around three times for the first income plus the second income, or two-and-a-half times your joint income. So a couple applying for a mortgage where one earns £25,000 and the other £15,000 a year, would calculate the amount as follows: either three times the first income - £75,000 - plus the second - £15,000 - making a total of £90,000, or 2.5 times the joint income - £40,000 - adding up to £100,000.

There are lenders that will allow you to borrow more. However, this will depend on your individual circumstances, income and even any existing relationship you may have with your lender.

Loan to Value

What will also determine how much you can borrow is the loan to value (LTV) rate. This is the percentage of the value of the property a mortgage provider is prepared to lend you. Most providers will not lend above 95 percent of their valuation of the property, preferring you to have a least five percent deposit. While there are a number of lender now prepared to offer 100 percent loans, generally, the interest rate will be higher because lenders consider it a greater risk. Also, lenders will often apply additional charges to higher LTV rates, such as a Mortgage Indemnity Guarantee (see True Costs).

Self-Employed

If you are self-employed, the amount lenders will usually allow you to borrow will be based on the average of your earnings over the past three years.

Generally, the income multiples for self-employed applicants are not as favourable as for PAYE applicants. Specialist lenders are prepared to offer more but even then, as a single applicant, you will probably be restricted to three-and-a-quarter times your income, and joint applications to two-and-a-quarter times your combined income. Loan to value rates tend to be lower too, with most lenders offering 75 percent, although a few do go to 85-90 percent.

How Much Can I Afford?

This is probably the more telling question rather than the maximum amount you can borrow. A good start is to make a list that includes all of your expenses - right down to the small change you might use to buy lunch during the week. It all adds up! Look first at the expenses which are more difficult to influence and reduce, such as council tax; then look at those costs which, through decreasing consumption, you may to able to adjust in some way, such as gas and electricity; and finally, include those expenses which if you needed to, you could cut down quite significantly, like holidays and entertainment.

Everyone's circumstances are different and will be affected not just by current situation but also by future plans. Interest rates may be low at the moment but thy have been considerably higher in the last 20 years and it is important to carefully calculate your income and expenses to ensure you do not over commit.

Other Costs

When calculating the amount you can afford for your new home, bear in mind that you will have one-off costs associated with your move that you will meet - such as solicitors' and surveyors' fees, stamp duty, the lender's administration fee, the cost of physically moving, plus any repairs and decoration you feel are necessary. There are also various insurance packages which you will need. Buildings insurance is mandatory and others you should consider include life, contents, critical illness, income protection and MPPI cover.

Interest-only Mortgage

With an interest-only mortgage the capital of the loan is not paid off until the end of the mortgage term. You will pay interest on the loan to the lender and also pay into an investment scheme - either an endowment, ISA or pension plan - designed to grow in value over the mortgage term to pay off the capital loan.

The figures below are the payment to the lender and simply cover the interest on the loan. They do not include payments into an investment scheme. All figures are based on a 25 year term.

How to use the figures: For a 25 year £65,000 mortgage at an interest rate of 6.75 percent, calculate 65 x £5.63 = £365.95 per month.

Monthly repayments per £1,000 borrowed

Repayment Mortgage

With a repayment mortgage part of your monthly payment goes towards paying off the capital and part of the interest on the loan.

The monthly payment to the lender is usually higher than for an interest-only mortgage because with an interest-only loan you also have to make monthly payments into an investment scheme. Again, the figures below apply to a term of 25 years.

Use the figures below to work out how much your monthly payment would be on a 25 year mortgage term. For example; to work out the cost of a 25 year 65,000 mortgage at an interest rate of 6.75 percent, calculate 65 x £6.90 = £448.50 per month.

Monthly payments per £1,000 borrowed