What percentage of income should go to your mortgage?

What percentage of income should go to your mortgage?

A common rule of thumb is that no more than 28% of your gross income should go to your mortgage. For example, if you earn £40,000 a year, you’ll take home £3,333 gross per month. So using this 28% rule, your mortgage payments should be no more than £933 a month.

But while this may be a useful starting point, there’s a lot more to consider when it comes to what percentage of your income should go to your mortgage. Read on to find out more.

How do mortgage payments work?

• When you apply for a mortgage, you agree to make repayments each month over a fixed period of time.
• If you take out a fixed rate mortgage, your repayments will be the same during this period. While if you get a variable rate mortgage like a tracker mortgage, your repayments could go up or down. Read more about these and different types of mortgages in our guides What type of mortgage should I get?
• Most mortgages are repayment mortgages. This means your monthly payments cover the interest on the loan and pay back part of the capital (the original amount you borrowed) too. As a result, you will have paid off the mortgage at the end of the mortgage term.
• However, it is possible to get interest-only mortgages, which only cover the interest on the loan each month. These can be used for residential mortgages but are more commonly used by Buy to Let landlords.

How much mortgage can I get?

Lenders usually let you borrow up to between 4.5 and 5 times your salary – although some lend as much as 6 times.

But lenders must also assess the monthly payment you can afford, after considering your outgoings as well as your income. This is called an affordability assessment.

How mortgage lenders assess what you can afford

When you apply for a mortgage, the lender will look at your personal circumstances when assessing how much you can afford to borrow on a mortgage, including:

1. Household income 

• This includes basic income, any other income such as overtime, bonus payments or a second job, income from your pension or investments, any child maintenance or financial support from ex-partners.
• You’ll need to supply payslips and bank statements as evidence. If you’re self-employed you’ll usually need to provide two or three-years’ worth of tax returns and business accounts. 

2. Outgoings

• The lender will also consider your household spending each month, such as bills (council tax, gas and electricity, water, broadband), loan repayments like a car lease, childcare costs and any school fees.
• Your everyday expenses such as spending on food, holidays and leisure, will also be taken into account.

3. Credit score

• Lenders will check your credit report too. If you’ve got a history of bad credit, you may be able to borrow less and at higher rates. So it’s important to improve your credit score as much as possible before applying for a mortgage. Read our guide on 11 tips to improve your credit score for a mortgage.

4. Deposit size

• You usually need at least a 5% deposit to get a mortgage but the bigger your deposit, the better the mortgage rates you may get access to. If you get a lower rate, your mortgage repayments will also be lower. So a lender may decide you can afford to borrow a bigger mortgage than if you had to pay a higher rate.
• Also, some lenders allow you to borrow a bigger multiple of your income if you have a bigger deposit. For example, HSBC’s maximum income multiple is 4.49 if you have less than a 15% deposit. But for a 15% deposit or more, it lends up to 5.50x your income. Although this amount depends on how much you earn. Jump to information on how much deposit you need for a mortgage.

5. Loan-to-income ratio

• When you apply for a mortgage, lenders will calculate your ‘Loan to income ratio’. Lenders typically lend up to 4.5 to 5 times your income, so if you earn £40,000 you may be able to borrow up to £200,000.
• However, maximum loan to income ratios vary by lender. Some of the best mortgage lenders will lend up to 6x your income, depending on your circumstances. So if you earn £40,000 you may be able to borrow up to £240,000.

6. Debt-to-income ratio

Lenders will also consider your debt-to-income ratio, which is your monthly debt repayments (mortgage, loans, credit cards etc) compared to your gross monthly salary. To get this figure you divide your monthly debt payments by your gross monthly income and multiply by 100.

• For example, if your monthly debt payments cost £1,000 a month and your gross income is £3,000 a month, your debt to income ratio is 33.3%.

• Anything between 0% and 39% DTI, (which ranges from very low to acceptable risk), is generally considered as a good DTI.
• Between 40% and 49% DTI, you’re likely deemed a higher risk and may need to jump through more hoops.
• 50% DTI+ may be considered high risk so the application process may be more rigorous and you may get access to higher interest rates.

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How much mortgage can I afford?

While lenders have their own method of working how much they’ll lend you, you’ll also need to figure out how much you feel you can afford on a mortgage.

Here are some of the key factors to consider when working out your ideal mortgage to income ratio

1. Your income including how much you earn, your job security and prospects for pay rises. You be happy to borrow a higher amount if you’re expecting a big pay rise. But also consider how you’d cope if you lost your job. Also, if you are planning a family, don’t plan on the basis of dual-income-no-kids lifestyle
2. How much money you need each month for living costs. Be realistic and allow wiggle room to allow for essential bills going up in price.
3. Will the mortgage be more or less than your current rent? If you are struggling to pay your rent, and the mortgage is more – think again.
4. Can you cover the basic maintenance costs of a house? Many new homeowners struggle to pay the always surprisingly large wear and repair costs that go with owning a home (but not renting one)
5. How much you expect moving costs and any renovation costs to be – if you’re buying a house, you’ll need to take into account extra moving costs you’ll need to pay.
6. How much house you want. Are you happy being “house poor”, with a big house but little disposable cash? Or would you prefer a more modest house with more cash in your bank account?
7. What safety net you have in terms of savings – or family support? Can you push yourself to borrow more knowing you’ve got a financial safety net if you struggle? Or do you need to be more conservative?
8. Your appetite for risk – how much debt you are comfortable with

Mortgage calculators

Mortgage calculators are a good place to start to see how much you can afford to borrow. The following affordability calculator shows you instantly how much you may be able to borrow and afford based on your income. While the following mortgage cost calculator will also give you an idea of what your monthly mortgage costs are likely to be.

What other mortgage costs are there?

When you take out a mortgage, there are other costs to pay too, including:

• Buildings insurance Most mortgage lenders insist you have buildings insurance so that if your home is damaged they are not left without collateral for the loan
• Contents insurance Mortgage lenders won’t insist on this, but it means you’ll be covered for damage or loss of contents, such as furniture or jewellery, in the case of fire, theft or even accidents
• Life insurance: You don’t need life insurance when buying a house and taking out a mortgage but it can be a very good idea to do so if you have dependents that rely on your income. See our guide to life insurance. It’s advisable to shop around for life insurance. Our partners at LifeSearch compare quotes from a range of major UK life insurers and offer fee free advice and no obligation quotes. 

These include the mortgage fees for taking out the loan such as arrangement fees, mortgage val

Mortgage Fees	How much you may typically pay
Arrangement fee	Up to £1,500
Booking fee	Up to £250
Mortgage valuation fee	Up to £300
Telegraphic transfer fee	£25 to £50
Mortgage account fee	£100 to £300
Mortgage broker fee	£0- £1,000s
Early repayment charge	1% to 5%
Exit fee	£75 to £300

Read more in our guide Mortgage fees explained:

Costs of buying a house

There are other costs involved with buying a house that you need to make sure you can afford including:

• The total purchase cost. On top of the house price, you may have to pay for Stamp Duty, conveyancing fees, survey costs, mortgage fees etc, which can all add up to 7% onto the house price.
• Don’t forget the estate agent fees you have to pay if you are selling your existing home
• There are also the costs of furnishing your home. On average, home movers spend £5,000 on new goods.
• The cost of renovation works. What are the emergency works you have to do that can’t be put off – such as getting the boiler to work? Or are you thinking of replacing the kitchen urgently?

How much deposit do I need to get a mortgage?

You’ll usually need at least a 5% deposit to get a mortgage but the bigger the deposit you have, the bigger the choice of mortgages you will have and you’ll usually get access to better first time buyer mortgage rates.  

Saving a house deposit is one of the biggest hurdles first time buyers face. The size of deposit you’ll be able to save depends on:

• What savings you have. If you are saving to buy a house, you may want to consider a Lifetime ISA
• What support you get from your family. See our guides on gifted deposits and how to help your child buy a home
• What capital you can raise from selling an existing home, or extending a mortgage on a property you are not selling

Once you’ve added these amounts together, you need to deduct any costs of buying a home, moving and renovating, as well as any savings safety-net you want to keep.

The final sum is the amount you have available as a deposit that you feel you can afford to put down towards the cost of your home. Read more in our guide How much deposit do I need to buy a house.

See our mortgage cost calculator to see what your monthly mortgage payments will be for different options to work out what you can afford.

How to get a mortgage step-by-step

Here are the steps you need to take to get a mortgage:

1. Get a mortgage in principle

Timeline: Instant

A mortgage in principle, sometimes called an agreement in principle (AiP) or decision in principle (DiP), is a statement from a lender on how much they would lend you ‘in principle’ based on information you have provided about your income and outgoings. 

You should get a mortgage in principle as early in the house-buying process as possible, ideally before you start house-hunting. This is because you can show the mortgage in principle to estate agents to show you’re a serious buyer.

You should be able to get a mortgage in principle for free. With our partners at L&C, you can get a personalised Decision in Principle in just a matter of minutes. And unlike some other lenders, getting a Decision in Principle from L&C won’t impact your credit score. There’s no obligation to proceed with the deal they find you, but it gives you a good indication of how much you can borrow.

Arrange an Mortgage Decision in Principle today with the mortgage experts at L&C

2. Apply for your mortgage

Timeline: 20 minutes+

Once you’ve found a property and had an offer accepted, you can start the formal mortgage application process. This stage is much faster if you use a mortgage broker as they’ll do the mortgage application for you.

When you apply for a mortgage, you’ll need to provide documents including bank statements and proof of earnings. If you’re employed, you’ll usually need to show your recent payslips and your P60. While if you’re getting a self-employed mortgage, you’ll usually need your last two years’ SA302 tax calculations and your tax year overviews for those years too.

3. Getting a mortgage offer

Timeline: 2-4 weeks

It can take 2-4 weeks to get a mortgage offer once you’ve made your full mortgage application, providing your application is relatively straightforward.

During this time there are a number of stages that will happen before the mortgage offer can be approved:

• The mortgage lender will review all the information you have provided and carry out a credit check. The lender may ask you to provide additional information.
• The lender will also instruct for a surveyor to carry out a mortgage valuation to ensure the property is worth what you’ve agreed to pay for it.

However, delays could be caused if the lender is  particularly busy or if you haven’t submitted the right paperwork. It can also take longer to get a mortgage offer if you’re self-employed or have a poor credit score.

What happens next if your application is successful

You’ll need to sign the contract with your lender. Your conveyancer will then continue the legal work to get you ready to exchange contracts. At this point a completion date should be set and your conveyancer will liaise with your lender to release the funds to buy the house. Read more about the conveyancing process in our guide Conveyancing timeline: How long does it take?

What to do if your application is rejected

There are lots of reasons why your mortgage application may have been rejected such as having a poor credit history, too much debt or not being registered to vote. We always recommend you use a mortgage broker. This is especially true if you have had a mortgage application declined.

Brokers know the market and know what lending criteria every firm has. This means they can match you to the right lender for your personal circumstances. A broker can also help you assess your previous application and work out where you went wrong. Read more in our guide Mortgage declined: Here’s what to do next

Get fee free mortgage advice from our partners at L&C. Use the online mortgage finder or speak to an advisor today.

Getting a mortgage from your bank vs a broker

Pros of using a mortgage broker for first time buyer mortgage advice

• If you go directly to a bank or building society, they’ll only show you the mortgage deals they offer. But by using a mortgage broker, you’ll have a wider range of deals to choose from and can help you find the best mortgage lenders. This means you may get access to better mortgage rates (ie cheaper monthly mortgage payments), you may be able to borrow more money and you may have a greater chance of being accepted too because a broker will match you to a lender that’s most likely to accept your application.
• Mortgage brokers can be particularly useful for first time buyers because they’ll be on hand to answer your questions along the way.

Disadvantages of using a mortgage broker

• Some brokers charge for their mortgage advice for first time buyers and this can amount to hundreds or even thousands of pounds. So we advise using a fee-free mortgage broker. Award-winning brokers L&C don’t charge a penny for their mortgage advice for first time buyers.

Video: How to get a mortgage

How to get a mortgage