Income Requirements for a Mortgage
One of the most critical factors in securing a mortgage is your income.
Whether you’re buying your first home or considering a remortgage, understanding how much income you need and how lenders assess your affordability is essential.
Here we loosely explain the income requirements for a mortgage, how lenders calculate what you can borrow, and why expert advice from Kerr & Watson can make all the difference in securing the right mortgage for you.
How Much Do You Need to Earn to Get a Mortgage?
The income required for a mortgage can vary significantly depending on the lender, your financial situation, and the property you’re looking to buy.
Generally, lenders use income multiples to determine how much they are willing to lend. This is often calculated as a multiple of your annual salary.
Typical Income Multiples
- 4 to 4.5 Times Your Income: Most lenders will offer a mortgage up to 4 or 4.5 times your gross annual income. For instance, if you earn £30,000 annually, you could potentially borrow between £120,000 and £135,000. This can be less on shorter terms, dependants or with debts in place.
- 5 to 6 Times Your Income: In some cases, lenders may offer mortgages at 5 or even 6 times your income. However, these higher multiples are typically reserved for borrowers with substantial deposits, high incomes, long terms and potentially those in certain professions such as doctors or lawyers.
While income multiples provide a general guideline, they are not the only factor lenders consider.
Your overall financial situation, including your credit history, deposit size, and existing debts, will also influence how much you can borrow so you should speak with a qualified mortgage adviser rather than relying on the lender’s calculators alone.
Find out Your Options
Factors Affecting Mortgage Affordability
While income is a significant factor, lenders take a more holistic approach when assessing your mortgage affordability. Here are some of the key factors that lenders consider, you can also utilise our affordability calculor:
Deposit Size
The size of your deposit directly impacts your loan-to-value (LTV) ratio, which is the amount you borrow compared to the property’s value. A larger deposit reduces the LTV ratio, making you a lower-risk borrower and potentially giving you access to better mortgage deals.
For example, a 30% deposit on a £200,000 property means you need to borrow £140,000, resulting in an 70% LTV. Lenders may offer more favourable terms if your LTV is lower, as this reduces their risk.
Credit History
Your credit history plays a crucial role in determining your mortgage eligibility. Lenders will check your credit score to assess your reliability in repaying debts. A good credit score can potentially open doors to better mortgage rates and higher income multiples, while a poor credit score may limit your options. To find out about your credit history, you can go to Check My File.
Existing Debts
Lenders will also consider any existing debts, such as credit cards, loans, or car finance. High levels of existing debt can reduce the amount you can borrow, as lenders will factor in your ability to manage additional monthly payments alongside your current financial commitments. Some lenders can disregard these if they are being repaid.
Employment Status
Your employment status, including whether you are employed, self-employed, or on a fixed-term contract, may also impact how much you can borrow. Find out about a joint mortgage when one applicant is self-employed.
Lenders may require additional documentation, such as tax returns or bank statements, to verify your income if you are self-employed.
How Lenders Calculate Mortgage Affordability
Lenders use a combination of your income, financial commitments, and other factors to calculate how much you can afford to borrow. Here’s how they typically approach the calculation:
Income Assessment
Lenders will first assess your total income, including your salary and any additional income sources, such as bonuses, investments, or rental income. For joint applications, lenders will combine the incomes of both applicants to determine how much income you need.
Affordability Assessment
After determining your income, lenders will conduct an affordability assessment. This involves calculating your disposable income by subtracting your monthly outgoings (e.g., bills, debts, and living expenses) from your monthly income. The remaining amount indicates how much you can afford to pay toward a mortgage each month.
Stress Testing
To ensure you can afford your mortgage payments in the future, lenders will “stress test” your finances by considering potential interest rate increases. They will assess whether you can still afford your mortgage payments if interest rates rise by a few percentage points.
These figures are based on standard income multiples and serve as a general guideline. The actual amount you can borrow will depend on the specific lender’s criteria and your overall financial profile so always speak with a qualified mortgage consultant to find out exactly what you can borrow in your individual situation.
Conclusion
Understanding the income required for a mortgage is crucial when planning to buy a home or remortgage.
While income multiples provide a useful starting point, lenders consider various factors, including your deposit, credit history, and existing debts, and more to determine how much you can borrow.
At Kerr & Watson, we’re here to help you secure the best mortgage for your needs. Whether you’re a first-time buyer or looking to remortgage, our expert advisors are ready to assist you every step of the way.
