Hello guys. One of the main questions I get asked from first-time buyers as a mortgage advisor is, “How much I can borrow?” Without finding out this figure, it’s near enough impossible to find that perfect house for yourself. The reason being, you might be looking at properties that are way outside of your budget, which you’re not only wasting your time, you’re wasting your estate agent’s time, and it’s nothing worse than finding that perfect property and it being just outside of your budget. On the other hand, you might be looking at substandard properties for your budget. You might need a three-bedroom property, but you think you can only afford a two-bedroom. So if you know exactly how much you can get agreed up to, it makes it so much easier in finding that perfect property.

In this video, I’ll be breaking down how lenders calculate how much it is you can borrow, so you can work out a rough calculation yourself. However, to get the exact figure, somebody would need to have a look at your documents to confirm exactly how much it is that you can borrow.

With every lender assessing your income completely different, it can be hard for first-time buyers to figure out how much it is that the lenders are prepared to lend them. And speaking to 10 different banks, you’ll come back with 10 different figures. As a general rule of thumb, lenders can tend to lend on average in the region of 4.5 times your annual salary. So for example, if you are earning £40,000 a year, you could borrow in the region of about 180,000. A few caveats to this. If you are a low-income earner, you’re earning below 15,000, lenders tend to put a smaller cap as to how much it is that you can borrow. And if you’re a high-income family, earning more than 60,000, there are lenders out there that can potentially lend up to six times your salary.

So when they’re calculating how much your annual income is, every lender will use 100% of your basic salary. Depending on the lender you speak to, they all assess additional income completely differently. So a definition of additional income is a bonus, overtime, or commission. Each lender looks on average for the last three to six months to calculate how much it is that you borrow. So the best way to explain that is if you work out the last three months’ worth of overtime, bonus, or commission, divide that by 3, and then times it by 12, and that’s how much the lenders [inaudible 00:02:10] in that instance. It’s important to make sure if you’re a highly commissioned job or you will get a lot of overtime, you need to make sure you maximize the amount you can borrow by speaking to a lender that can use 100% of that income.

If you’re self-employed or you own a limited company, lenders assess your income slightly differently. So if you’re a sole trader, they look at the last two years’ worth of your profits. And if you’re a limited company director, they look at the last two years’ net profits and also the money that you’ve taken from the company as a director’s salary. An average lender would look at the last two years worth of accounts. However, there are some out there that will just look at the one year for you instead.

Something that can have a detriment as to how much you can borrow is the number of financial commitments you’ve got. So if you’ve got a high amount of credit card debt, personal loans, or car hire, this can negatively impact how much it is you can borrow depending on the lender’s criteria at the time. The final thing that can affect how much you can borrow is the amount of deposit that you put down. From a lender’s perspective, the higher the deposit you put down, the less risk they tend to take for you. So they can tend to lend you slightly more money. If you’ve got a high deposit, such as 5% and 10%, because the lenders are taking on more risk lending you the funds, they tend to lend you slightly less.