So, you’re thinking about taking out a mortgage – congratulations! One of the first things to consider is your borrowing power, i.e., how much you can take out with a home loan.
You may have already got an estimation using our handy calculator or a mortgage in principle from the bank. If you’re here, the question you’re probably asking is – “How are mortgages calculated?”
We’re here to explain your mortgage borrowing power, so you can feel confident when house hunting.
Your mortgage “borrowing power” is the amount the bank will lend you based on your financial situation. Lenders use multiple factors to figure out how much you can realistically afford to borrow and repay over time.
Your borrowing power sets the budget for your property search and influences which homes are within easy reach. Let’s break down the key elements that determine how much you can afford.
UK mortgage lenders assess your affordability by looking at your income, outgoings, credit profile, and the terms of the mortgage you’re proposing. Here’s a quick overview of what they’ll look at when assessing your borrowing power.
Lenders start with your annual salary (and your partner’s if you’re applying together). They might also consider any bonuses, commission, or freelance income, depending on the lender.
Your monthly outgoings, like rent, loans, childcare, credit cards, and subscriptions, will be deducted from your income to assess what you can afford.
Having a healthy credit score (between 721 – 960) gives lenders confidence in you and your ability to repay. If it’s below-average, it could potentially limit your options or the amount you can borrow. Learning how to build your credit score over time may improve your mortgage terms.
Lenders will also look at your proposed mortgage term (i.e., 25 years). Applying for a longer mortgage spreads repayments and will reduce your monthly bill, but you will pay more interest overall.
Choosing a fixed or variable rate will affect your monthly repayment calculations, which can affect your affordability in the eyes of lenders.
The bigger your deposit, the less you need to borrow, and the better rates you’ll be offered. If you don’t have a large deposit, check out 95 percent and 100 percent mortgages – there are still ways to secure your first home.
Delaying your property search and building your house deposit will likely give you better terms overall.
When lenders start diving into your borrowing power, they don’t just look at your earnings – it’s also about how financially secure you are. If you’re disappointed by your mortgage estimate, here are some of the reasons why it may be lower than expected:
Lenders favour mortgage applicants with a steady, reliable income. If you’re on a permanent contract or salaried position, you’re likely to be offered more than someone who’s self-employed or working zero-hour contracts.
That said, self-employed buyers can still get a mortgage; you’ll just need to show at least two years’ worth of tax returns.
The more financial commitments you already have (like personal loans, credit card balances, or car finance), the less disposable income you have left over each month, and the lower your borrowing power.
Got children or other dependents? Lenders will factor this in. Having dependents increases your monthly outgoings and reduces the amount you can afford to borrow.
Lenders do look at your bank statements. If you’re regularly dipping into your overdraft or spending heavily on Amazon, travel, or takeaways, it could raise some red flags about your affordability.
Some lenders are extra cautious about lending on certain properties, like flats above shops, listed buildings, or non-standard construction homes. This can impact how much you can borrow or whether your application is even accepted.
Every lender has their own set of criteria, but a general rule of thumb is borrowing around 4 times your annual income. Some lenders even offer up to 5 or even 6 times your income (typically if you’re a higher earner with little debt) – but that’s not the norm.
Let’s look at a quick breakdown of the standard mortgage borrowing calculation.
Say you’re earning £35,000 a year and you’re applying alone.
A lender offering 4.5 x your income would calculate your borrowing like this:
£35,000 × 4.5 = £157,500
This figure is your estimated borrowing power – the maximum amount you can borrow before your deposit. This is only a guide. Lenders look at affordability in more detail, factoring in your monthly expenses, credit score, and how stable your income is.
Want to get an idea of your budget? Use our simple mortgage borrowing calculator below for an instant estimate. If you’d like expert, fees-free mortgage advice, please reach out to us here.
Once you have a mortgage in principle, you can start to think about what your monthly repayments might be. Here’s how it’s broken down:
Want to quickly work out your mortgage repayments? Use our handy mortgage payment calculator for an instant estimation. Make sure to have your loan amount, loan term, and annual interest rate to hand.
Understanding how lenders calculate your borrowing power is one of the first steps towards buying a home. Whether you’re a first-time buyer or moving up the ladder, knowing how mortgages are calculated gives you a major advantage. Want expert, fee-free mortgage advice for your unique situation? Our team is here to help. Get in touch with our trusted mortgage advisors for free, no-nonsense advice.
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