Understanding The Income Threshold For A Mortgage

If you’re in the early stages of property hunting – or if you’re at the point of planning your first purchase – you’re likely to be one of the millions of home buyers who must rely on a mortgage to take ownership of their future residence.

However, there are certain criteria that prospective borrowers must meet to be approved for finance of this kind. One of the most crucial is income.

In this article, we explore the typical income threshold for a mortgage required by lenders before a mortgage will be provided.

What salary do you need to get a mortgage?

The amount you’ll need to earn to pass the income threshold for a mortgage before lenders will approve will vary as it is calculated based on the value of the property you are planning to purchase.

While the specific stipulations of certain banks and building societies may differ based on the current state of the UK economy and interest rates – as these factors will affect the affordability of each mortgage product – there are some criteria that the majority of lenders have in common.

For example, it was at one time a common rule that lenders would multiply a borrower’s salary by 4 to 4.5 to decide on the maximum size of the mortgage loan they may take out.

However, it is important to note that with recent rises in interest rates and increases in the cost of living, many lenders are now more cautious and will rely on their affordability calculations rather than simple income multiples.

For that reason, the best way to get an accurate guide to how much you can borrow is to contact us.

We can then help to find the lender whose income and affordability criteria best work for your circumstances.

The following is therefore only a very rough guide and should not be solely relied upon.

The Times uses an example of a person earning £30,000 annually who, by the 4-4.5 multiplication rule, might borrow between £120,000 and £135,000.

Similarly, a person on a £50,000 wage might borrow between £200,000 and £225,000 – while someone on £70,000 might borrow between £280,000 and £315,000.

It’s worth remembering how much mortgage you can borrow and how much you can afford may differ. Therefore, it’s a good idea to consider whether you can comfortably afford the repayments on a large mortgage. A good rule of thumb is to avoid spending more than 30% of your income on mortgage repayments. Any more than this could leave you without money to do other things, such as home improvements, build up your savings or go on holiday.

What is the qualifying income threshold for a mortgage?

Lenders rarely set a minimum income threshold to qualify prospective borrowers for a mortgage. However, according to onlinemortgageadvisor.co.uk, there are certain exceptions to this.

Some smaller-scale lenders will only provide finance to borrowers earning over a certain amount, with the lowest acceptable salaries usually ranging from £10,000 to £25,000.

If your income is lower than the UK average (which is currently £28,000 per annum pre-tax, according to Forbes), it may be worth checking in with the lenders you are considering to ensure that they do not employ a base threshold – or that your earnings fit with their criteria.

How do banks calculate your borrowing power?

The main criteria taken into consideration by mortgage lenders are:

• Income
• Outgoings
• Credit history and rating
• Debts
• Dependents

A person’s income and outgoings are usually the main factors taken into consideration by mortgage lenders before realistic options can be presented.

There will also be an exploration of the individual’s credit history and an investigation of any existing debts, and providers will also seek to determine whether or not the prospective borrower is currently in the process of repaying other loans.

Lenders will also take into account the number of dependents a person happens to have, as the impact of this factor on their ability to repay a mortgage may vary month on month.

To a certain extent, different banks and lenders will have their specific criteria – which is why, as a borrower, you may find an identical mortgage application rejected by one entity but accepted by another.

Mortgage pre-approval

If you can get pre-approved for a mortgage, you will find much of the borrowing process a great deal easier.

Obtaining a pre-approval letter following a consultation with a lender shows that you are serious about buying, helps you to understand the maximum amount you will be able to borrow and may enable you to convince mortgage providers of your eligibility once you have found the right property.

Mortgage pre-approval gives a boost to your borrowing power and puts you in a strong position to act, so you will have fewer things to worry about during a property search or mortgage application process.

How do outgoings affect your ability to borrow?

If your outgoings are high, you will be considered a more risky prospect for a mortgage lender, as, logically, you will be more likely to default on your repayments.

The more of your wage you spend every month, the less you save – and the less you have available to make repayments.

How can I maximise my borrowing power?

There are several ways to make yourself a better prospect to mortgage lenders – and to achieve more affordable loan repayments as a result. Some methods are more straightforward, while others will take greater levels of planning and financial management to achieve.

Some of the clearest ways to maximise your borrowing power include:

• Asking for a longer mortgage term. You may be able to afford more if you spread repayments over a 35-year term instead of 25. This does mean higher levels of interest, of course
• Consider changing your deposit size if you can. Lenders usually require a minimum mortgage deposit of 5% – but if you can afford more, your repayments will be lower
• Improving your credit rating (simple ways include paying bills on time, getting onto the electoral register and even having a landline)
• Reducing your expenditure where possible
• Cancelling credit cards and closing credit accounts
• Paying off as many existing debts as possible
• Waiting until you receive a pay rise
• Getting your accounts in order – particularly if you are self-employed

When purchasing property with a partner or another individual, lenders may also consider combining your income to get you a better deal if they feel it is pertinent to do so.

It is also very important to take your time and find the right deal. Different lenders will have different criteria and priorities when deciding whether or not to approve a borrower for a mortgage – and when determining the value of that loan. It’s up to you to find a good fit.

Mortgage advisers and brokers can be very helpful here, as they will have access to the entire market, saving you time and stress.

Can you get a mortgage on a low income?

As long as your chosen lender deems that you have the financial capacity to make monthly repayments, there will still be mortgage products to suit your requirements – even if your income is well below average.

Naturally, it will be important to consider properties on the more affordable end of the market to ensure that your repayments will be manageable.

It’s worth noting that there is currently a government scheme in place whereby you may access a “shared ownership” mortgage. These products enable you to buy a “share” of a property using a mortgage, then pay rent to a housing association or the government to cover the remainder.

Long-term ISAs are also available for use towards either a first-time property purchase or retirement. When the funds are withdrawn from ISAs of this kind for either purpose, you will receive a government bonus of 25%.

There are also no-deposit mortgages now available, along with guarantor mortgages.

What is a guarantor mortgage?

Another option for low-income borrowers is the guarantor mortgage. By naming a guarantor (usually a friend or family member who owns the property) on your mortgage agreement, you may be approved for property finance.

This second individual will be required to offer up their property as security – enabling the lender to reclaim funds from this resource if you fail to make sufficient repayments in time. They will also be held accountable for any repayments you miss.

In many cases, guarantors are also required to place a sum of money into a savings account managed by the lender, which they may not access until a pre-agreed amount of your mortgage is repaid.

How can Mortgage Xperts help you surpass the income threshold for a mortgage?

Mortgage lenders rarely stipulate a minimum income for borrowers. However, the amount you may borrow will depend on the current market and your financial position and credit history.

If you wish to learn more about the mortgage products that might be available to you, feel free to get in touch with the team of property finance specialists at Mortgage Xperts today.