How much could I borrow? The limits that lenders set for the capital amount

The amount that a lender will be wiling to give you depends on a series of factors.

The amount that you need from your lender depends on the loan to value ratio that you have chosen and the value of the property that you wish to purchase.

Some considerations about LTV (Loan to Value):

After you have assessed what your starter amount is, essentially what you already have in your pocket, it is important to take in account the fees and taxes that you will have to pay for the actual purchase of the property and the set-up fees associated with the mortgage.

Once you have subtracted the fees and taxes for both the purchase and the set-up of the mortgage from the initial amount that you have in your pocket, the remainder is the amount of the purchase price that you can cover on your own.

If you subtract the portion you can cover from the purchase price you end up with the amount that you wish to borrow.

The more of the purchase price you wish to borrow, the higher your mortgage cost will be.

Lenders offer anywhere from 75% of the purchase price to 100% or even more.

What you can borrow

Now that you know what amount you need let’s find out if lenders are willing to give it to you.

Lenders decide the maximum amount that you can borrow based on a couple of things:

Your yearly income (or combined incomes as a couple)

Your outgoings

Your credit history

Other guarantees you may come up with

Property Type

Income

Typically a regular individual with a clean credit history will be granted 3.5 times his annual income.

Because of the high level of competition between lenders, nowadays each applicant’s circumstances are analyzed in detail. Lenders now differentiate between a person that has no obligations to third parties, is single and has no dependents and a applicant with a family and other types of dependents.

A person without a family or other types of financial obligations may even get 5 times his annual income.

A couple in which both individuals earn income and wish that the joint income be considered can be subject to two types of calculation method. The maximum borrowing amount can be either 2 ½ times their joint annual income or 3 to 3 ½ times the greater income plus the yearly income of the second.

Outgoings

Most lenders will also analyze your regular expenses, your outgoings, and will establish your maximum borrowing limit according to this. The higher your outgoings are, the lower your borrowing limit will be.

For example, if you are married and have children you will not be able to borrow as much as a single person with the same income.

Your credit history

If you have a good credit history than the normal rules apply to you.

If you have bad credit history than your best bet is to try to work out errors on your record so they are wiped clean. If this is not an option you will probably have a considerably lower borrowing limit and will have higher mortgage costs as you would otherwise.

Other guarantees

If you wish to strengthen your case so you might borrow more or get a better deal because of increased credibility and repayment security you could use a guarantor or you could consider adding more sources of income that you might have not declared initially.

Your willingness, if not imposed by the lender, to pay for mortgage payment protection insurance could also strengthen you case.

Property Type

Also, if the property you wish to purchase is decrypt, in need of a lot of repairs or in a bad area your lender might consider lowering the maximum amount that you can borrow.

Final Word

p>If you can not get the amount that you need from a lender that you have selected after careful consideration you could change lenders or you might consider opting for a cheaper property.

We do not advise you to opt for 100% mortgages, as they will burden you with higher costs than necessary. Also consider the fact that at the beginning of the 90’s some people were paying mortgage interest of up to 15% so never borrow up to the limit of your finances because we can never know what interest rates will be ten or twenty years from now.

If a lender has set your borrowing limit significantly lower than would have expected consider that you might have been too optimistic about what you can afford to payback. Remember that lenders have every interest to lend as much as you can afford to pay back and that their assessments, although not always accurate, are a result of experience.

Because is important to understand all the elements that influence your borrowing ability and your mortgage in general we advise you to have a read over more of our other guides on mortgages. Remember that a mistake or overlooked aspect at the beginning of your mortgage can amount to loses of thousands or tens of thousands of pounds over the life of the mortgage.