Buying a home is one of the biggest financial commitments you’ll make in your lifetime. But how much do you need to earn to qualify for a mortgage?
In this article, we’ll explore the factors affecting mortgage affordability and provide tips for improving your chances of securing a mortgage of £600,000.
In the case of a £600,000 mortgage, you would therefore need to earn at least £150,000 per year to qualify.
Factors affecting mortgage affordability
Income
Lenders initially use income multiples to calculate your maximum borrowing capacity.
This approach involves multiplying your gross annual income by a set number to determine the amount you can borrow. The income multiple varies by lender but is typically around four times your income.
In the case of a £600,000 mortgage, you would therefore need to earn at least £150,000 per year to qualify.
Credit history
Your credit history is another significant factor that affects mortgage affordability.
Lenders use your credit score to assess your ability to manage debt and your likelihood of defaulting on a loan. If you have a low credit score, you may be deemed a high-risk borrower, and your mortgage application may be denied or offered at a higher interest rate.
To improve your credit score, pay your debts on time, keep your credit utilisation ratio low, and avoid applying for too much credit at once.
Debt-to-income ratio
Your debt-to-income (DTI) ratio is the amount of debt you have relative to your income.
Lenders use this ratio to determine how much you can afford to borrow. To calculate your DTI, add up your monthly debt payments and divide them by your gross monthly income.
Aim to keep your DTI ratio low. If your DTI is too high, consider paying off debt or increasing your income to improve your chances of qualifying for a mortgage.
Loan-to-value ratio
The loan-to-value (LTV) ratio is the amount of the mortgage loan relative to the value of the property.
The higher the LTV ratio, the riskier the loan is for the lender. In general, you’ll need to have a deposit of at least 10% of the property’s value to secure a mortgage. The larger the deposit, the lower the LTV ratio, and the lower the interest rate.
Interest rates
Interest rates play a pivotal role in mortgage affordability.
A higher interest rate means higher monthly mortgage payments and, in turn, higher borrowing costs over the life of the loan. To get the best mortgage rates, maintain a good credit score, save for a larger deposit, and shop around for the best deals.
Term of the loan
The length of the loan term also affects mortgage affordability.
Longer loan terms typically result in lower monthly payments but higher total borrowing costs over the life of the loan. Shorter loan terms have higher monthly payments but lower borrowing costs overall. Consider your budget and long-term financial goals when choosing a loan term.
Repayment method
You can choose from two primary repayment methods for your mortgage: interest-only and repayment mortgages.
With an interest-only mortgage, you only pay the interest on the loan each month, and the principal balance remains unchanged.
With a repayment mortgage, you pay both the interest and principal, and the balance decreases over time. Repayment mortgages are more popular because they help you build equity in your home over time.
Estimating mortgage affordability
Mortgage affordability really drills down in to how much you earn and how much you spend.
A person may earn £150,000 per year but may not be able to afford the repayments on a £600,000 mortgage as they have so many other commitments to pay for.
The Financial Conduct Authority (FCA) regulates lenders to ensure that they only offer mortgages that borrowers can afford. These assessments shouldn’t just be a snapshot of your current financial situation. Lenders should consider your ability to make repayments over the entire mortgage term, taking into account potential future changes.
This is one of the reasons why your bank statements are required. The lender will be looking at how and when you spend your money each month.
If you do have quite a few regular commitments such as; personal loans, credit cards & school fees, you will need an income higher than £150,000 to qualify for a £600,000 mortgage.
How much do you need to earn for a £600,000 mortgage?
To qualify for a £600K mortgage, you would need to earn at least £150,000 per year.
This assumes that the lender uses an income multiple of four times your gross annual income.
If they use a multiple of five times, you would need to earn at least £120,000 per year.
Applying as a ‘professional‘ can mean getting access to some better deals and increased income multiples of 5 or 6 times income.
You also need to have a good credit score and a deposit of at least 10% of the property’s value. Finally, you should consider choosing a loan term and repayment method that is suitable for your budget and long-term financial goals.
However, keep in mind that your credit score, debt-to-income ratio, and loan-to-value ratio also factor into the lender’s decision. It’s always a good idea to check with a mortgage broker to see what you qualify for and how to improve your chances of securing a mortgage.
Mortgages for professionals
Securing a mortgage can be a challenging process, but if you are a professional with qualifications and a stable income, you could be eligible for mortgages designed specifically for certain occupations.
Typically, this includes solicitors, accountants, doctors, and others who are viewed as having stable, high-earning professions.
Your status as a professional may grant you access to exclusive rates or bespoke deals that general mortgage products don’t offer.
How much are the mortgage repayments?
Your mortgage repayments will depend on a number of factors, including the size of the mortgage, the interest rate, and the length of time you’ll be paying it back.
So, what does this all mean in terms of a large loan such as a £600000 mortgage?
Let’s say you take out a 25-year mortgage at an interest rate of 4%. This would mean your monthly repayments would be approximately £3167.
If you increase the interest rate to 5%, your monthly repayments would go up to around £3507 – that’s an extra £340 a month, or £4080 a year.
You will find more useful information here: What are the monthly repayments for a £600,000 mortgage?
Additional costs
When buying a home, it’s essential to consider the additional costs involved in the process. These costs can include:
Mortgage deposit
You’ll need to save for a deposit of at least 10% of the property’s value to secure a mortgage. The larger your deposit, the lower your LTV ratio and the lower your interest rate.
Mortgage fees
Mortgage fees can include arrangement fees, valuation fees, and booking fees. Be sure to factor these costs into your budget when estimating your overall mortgage affordability.
Stamp duty
Stamp duty is a tax that you’ll need to pay when buying a property over a certain value. The amount you pay depends on the property’s value and your residential status. Consider ways to reduce your stamp duty, such as buying a property below the threshold or as a first-time buyer.
Conveyancing fees
Conveyancing fees are legal fees paid to a solicitor or conveyancer for handling the legal process of transferring ownership of a property. These fees can vary, so it’s worth shopping around to find a good deal.
Survey and valuation fees
You’ll need to pay for a survey and valuation of the property to ensure that it’s in good condition and worth the purchase price. Be sure to find a qualified surveyor to ensure that you get an accurate assessment of the property’s condition.
Insurance and ongoing costs
Owning a home also comes with ongoing costs, such as home insurance and council tax. Be sure to factor these costs into your budget when estimating your overall mortgage affordability.
How to improve your mortgage affordability
Improving your credit profile, reducing your debt-to-income ratio, and saving for a larger deposit are all ways to improve your chances of securing a mortgage. Consider the following tips:
Improving credit profile
Pay your debts on time, keep your credit utilisation ratio low, and avoid applying for too much credit at once. If you have a thin credit file, consider applying for a credit-builder card or loan to establish a credit history.
Reducing debt
Pay off high-interest debt first, such as credit card balances or personal loans. Consider consolidating your debts into a single loan with a lower interest rate to make it easier to manage.
Saving for a larger deposit
Consider ways to save for a larger deposit, such as cutting back on unnecessary expenses or increasing your income. A larger deposit means a lower LTV ratio and a lower interest rate.
Can you get a £600,000 mortgage with bad credit?
Bad credit can make it more challenging to secure a mortgage, but it’s not impossible.
You may need to work on improving your credit score or consider alternative lenders who specialise in bad credit mortgages.
Can you get a mortgage if you’re self-employed?
Yes, you can get a mortgage if you’re self-employed.
However, the process can be more challenging than for salaried employees. Lenders are usually more cautious when assessing the income of self-employed borrowers, as it can be less stable and predictable than that of someone with a regular salary.
As a self-employed borrower, you’ll need to provide more detailed documentation to prove your income and demonstrate your ability to repay the mortgage.
Certain lenders will allow you to use limited company retained profits to boost your income calculation.
CONTACT A MORTGAGE BROKER
If you are ready to take the next step then we can put you in touch with a fully qualified independent mortgage broker.
How can a mortgage broker help?
A mortgage broker can help you find the best mortgage deals and possibly borrow more than £600K if needed.
They can also investigate the viability of a professional mortgage or a scheme that offers enhanced income multiples. Brokers have access to a wider range of lenders and can help with the mortgage application process and paperwork.
Securing a £600,000 mortgage requires careful consideration of your income, credit history, and other financial obligations.
By improving your credit profile, reducing your debt-to-income ratio, and saving for a larger deposit, you can improve your chances of qualifying for a mortgage.
Be sure to consider the additional costs involved in buying a home, such as mortgage fees, stamp duty, and ongoing costs.
Consult a mortgage broker to get the best mortgage deal and ensure that you can afford your monthly mortgage payments.
