How do I work out my maximum mortgage potential?

by Mortgage Pirate · Published 19/03/2024 · Updated 08/03/2024

Everyone wants to know their limits and when it comes to taking out a mortgage this is no exception. Knowing your maximum mortgage potential is a useful tool when viewing property. You may be able to stretch a little further to find the perfect home instead of making compromises. However, it remains vital that any mortgage is affordable and within your limits so don’t stretch your budget too far.

Maximum mortgage borrowing - Mortgage Pirate

How do lenders work out my maximum mortgage potential?

There is no single answer to this question as each mortgage lender have their own rules and calculations. However this blog post will equip you with knowledge that could help you reach your full potential. We will cover the key factors that lenders consider, bust some myths, and guide you towards maximizing your borrowing limit.

The Loan-to-Income Ratio.

The concept of Loan-to-Income (LTI) ratio is not new but has been tweaked over the years. It’s basically a formula that lenders use to assess how large a mortgage you can afford based on your income. The Financial Conduct Authority (FCA) in the UK regulates mortgage lending. They have a recommendation for this ratio. At present, most lenders cap the LTI at 4.5 times your gross annual income. This means, for example, if you earn £40,000 a year, the maximum mortgage you might be offered could be around £180,000 (4.5 x £40,000).

However, it is important to remember that this is only a recommendation. There are no strict rules in place. Meaning the true amount allowed under a lender’s LTI will take into account their attitude towards risk. They will also take a number of factors into consideration when deciding how close you can go to their theoretical borrowing limit. We will explore these in the next section.

Key point: While the 4.5x LTI is a good starting point when looking at your borrowing limit, explore different lenders and be prepared to shop around.

Someone who has gone from a poor credit history to an excellent score.

The background factors.

While income and deposit are crucial basics, lenders look much deeper when assessing affordability. Here are some additional factors that can influence your maximum borrowing potential:

Credit Score:
A strong credit score shows the lender that you have responsible financial management. Overall this makes you a more attractive borrower in their eyes. Potentially this could lead to a higher borrowing limit. However, a credit score doesn’t tell the entire story and should not be relied on in isolation.

What to do if your mortgage has been declined.
Mortgages with a less than perfect credit history.
The Power of a Deposit: A larger deposit demonstrates your financial commitment and reduces the lender’s risk. With a higher deposit, you may qualify for a larger mortgage as the LTI ratio can be stretched.
Debt-to-Income Ratio:
This is how much debt you have as a ratio against your earned income. For example; if you earn £30,000 before tax, but have £6,000 in total annual debt repayments, the ratio will be; £6,000 divided by £30,000 = 0.2 (or 20% when worked as a percentage).

Each lender has their own definition of what they deem to be a good or bad ratio. They will also look at how much potential credit is available to the applicants. This is credit that could be utilised after the mortgage has started. Typically a debt-to-income ratio around 35% or less is pretty good. Above 40% is where things may get a little tricky with some.

Existing debts like loans and credit card balances can impact your affordability. They affect how much disposable income you will have each month. The lower your debt-to-income ratio, the better your chances of securing a larger mortgage.
Employment Status:
Being permanently employed with a steady income inspires confidence in lenders compared to temporary or contract work. Self-employed applicants have found it more difficult to obtain high LTI maximum mortgages due to the Covid pandemic fallout.

Mortgage tips for the self-employed.
Living Expenses: Lenders consider your essential outgoings like food, utilities, and childcare costs to ensure your mortgage repayments don’t stretch you financially.
The Lender’s Leverage: Individual lenders have their own risk appetites. Some may be more cautious and stick to the 4.5x limit, while others might offer mortgages that stretch up to 5 times. There are even some lenders who can consider 6 times your income in very specific circumstances.

Boosting your maximum mortgage.

Now that you understand the core principles we can look into ways in which you can uplift your borrowing potential. Some of these are a quick fix but others may take a little planning. Of course, by combining two of more of these tips you could potentially boost your maximum mortgage considerably.

Boost your income:
Earning a higher salary directly translates to a higher borrowing threshold. Consider career progression or exploring ways to increase your income. Base salary is always the most stable form of income. Some variable pay such as overtime or commission may only be counted at 50% with some lenders. Ideally try to find one who will take 100% of this income into account.
Save for a larger deposit:
The bigger the deposit, the smaller the loan amount you need to borrow and the less risk to the lender. Each lender will have a sweet spot where the amount of deposit triggers the maximum LTI ratio. Each 5% extra deposit tends to trigger more relaxed lending criteria rules. Therefore try to push for around 5% more than your original intention if possible.

Parents can also help with a deposit. Check out our informative guide here.
Tackle existing debts and delay taking on new commitments:
Reducing your debt levels improves your debt-to-income ratio and frees up more of your income for mortgage repayments. Consider debt consolidation loans if you have a lot of credit card balances and only pay of the minimum each month.

Close any dormant credit accounts if you don’t plan on using them in the future.

Avoid “hunting” for debt when close to making a mortgage application and where possible keep the number of credit checks to a minimum as this can drop your overall score.
Consider a joint mortgage:
Applying with a partner can significantly increase your borrowing power. Lenders will feel comfortable that the household running costs can be shared. Sometimes a couple earning £30,000 each can borrow more overall than a single person earning £60,000.
Declare all income and seek professional advice:
Lenders can consider benefit income as well as that earned via a job. Be sure to include all sources of income.

A mortgage broker can check your financial situation, provide you with a decision in principle and recommend suitable lenders. They can help negotiate the best deals on your behalf.

Borrow smart.

Remember, pushing yourself to the absolute maximum isn’t always the wisest path. Those monthly repayments will be difficult to manage if there were to be an interruption to your income. So, it is crucial to borrow only what you can comfortably afford while factoring in future expenses and potential interest rate fluctuations.

By understanding the factors that influence maximum mortgage borrowing you’ll be well on your way to securing the perfect mortgage for your dream home.