If you’re considering buying a house or a flat in the UK, you’re probably wondering how much you need to earn to qualify for a mortgage.
A mortgage is a long-term commitment that can be challenging to manage if you don’t have a clear understanding of your budget and affordability.
In this article, we will explain what factors affect mortgage affordability and how to estimate how much you need to earn to qualify for a £750,000 mortgage. We’ll also provide tips for improving mortgage affordability and discuss additional costs to consider when buying a property.
Mortgage affordability factors
Income:
First and foremost, lenders look at your gross annual income. Using an income multiple approach, they first calculate your maximum borrowing capacity. Typically, lenders will lend up to 4.5 times your gross annual income, meaning you would need to earn around £167,000 per year to be eligible for a £750,000 mortgage. However, some lenders may be more flexible and lend up to 5 or 6 times your income.
Credit history:
Your credit history plays a significant role in determining mortgage affordability. Lenders use credit scores to assess the likelihood of borrowers making their payments on time. A higher credit score indicates a lower risk of default, which can lead to lower interest rates and better mortgage terms. To improve your credit history, you should make all your payments on time, reduce outstanding debt, and avoid applying for new credit.
Loan-to-value ratio:
The loan-to-value (LTV) ratio is the proportion of the property’s value that you’re borrowing. For example, if you’re buying a £1 million property with a £750,000 mortgage, your LTV ratio would be 75%. If you’re buying a £1.5 million property with a £750,000 mortgage, your LTV ratio would be 50% (and you’ll probably get some better rates).
Interest rates:
Interest rates can significantly affect your mortgage affordability. When interest rates are high, your monthly repayments will be higher, and you may not be able to afford as much. It’s essential to factor in potential interest rate rises when calculating your affordability.
Term of the loan:
The term of the loan refers to the length of time you’ll be making mortgage repayments. A longer-term means lower monthly payments, but you’ll end up paying more in interest over the life of the loan.
Repayment method:
The repayment method determines how you pay back the mortgage loan. The two most common repayment methods are capital and interest and interest-only. With capital and interest, you pay back both the principal and the interest each month. With interest-only, you only pay back the interest each month, and you’ll need to repay the principal at the end of the loan term. Capital and interest is the most common repayment method for residential mortgages.
Estimating mortgage affordability
To estimate your mortgage affordability, lenders use mortgage multipliers based on your income and other factors. The Financial Conduct Authority (FCA) prescribes rules for the banks and lenders to follow to ensure that borrowers can afford the repayments.
Typically, lenders will lend up to 4.5 times your gross annual income. However, it’s essential to consider other factors such as your credit history, debt-to-income ratio, and LTV ratio when estimating affordability.
How much do you need to earn for a £750,000 mortgage?
To calculate how much you must earn for a £750,000 mortgage, divide the mortgage amount by the income multiple (4-4.5). For example, £750,000 ÷ 4.5 = £166,667. This means you’ll likely need to earn at least £167,000 per year to qualify.
Assuming a multiple of four times your gross annual income, you would need to earn £187,500 per year to qualify for a £750K mortgage.
Additional costs
In addition to the mortgage amount, there are several other costs to consider when buying a property.
Mortgage deposit:
Typically, you’ll need to put down a deposit of at least 5-10% of the property’s value. However, the larger your deposit, the lower your LTV ratio and the better interest rates you’re likely to receive. Saving for a larger mortgage deposit can improve your mortgage affordability in the long run.
Mortgage fees:
Mortgage fees include arrangement fees, valuation fees, and booking fees. These fees can add up to several thousand pounds, so it’s important to factor them into your affordability calculations.
Stamp duty:
Stamp duty is a tax on property purchases, and the amount you’ll need to pay depends on the property’s value. You may be eligible for a stamp duty holiday if you’re buying a property before a certain deadline or if you’re a first-time buyer. Consider ways to reduce your stamp duty costs, such as buying a property in a lower tax band or negotiating the purchase price.
Conveyancing fees:
Legal conveyancing fees are charged by solicitors or conveyancers to handle the legal work involved in buying a property. These fees can vary, so it’s worth shopping around to find the best deal.
Survey and valuation fees:
Survey and valuation fees are charged by surveyors to assess the condition and value of the property you’re buying. These fees can also vary, so it’s important to find a good surveyor who can provide a thorough assessment.
Insurance and ongoing costs:
Owning a property comes with ongoing costs, such as home insurance and council tax. It’s essential to factor these costs into your affordability calculations.
How to improve mortgage affordability
If you’re struggling to qualify for a mortgage or want to improve your mortgage terms, there are several things you can do:
Improving credit profile:
To improve your credit status, make sure you’re paying your bills on time, avoid taking on too much debt, and check your credit report regularly for errors or fraud. If you have a thin credit file, consider taking out a credit-builder credit card or loan to establish a credit history.
Reducing debt:
To reduce your debt-to-income ratio, focus on paying off your debts and avoiding new ones. These include interest free finance agreements, bank account overdrafts and car finance schemes. Consider consolidating your debts into one loan or balance transfer credit card to reduce your interest charges.
Saving for a larger deposit:
Saving for a larger deposit can improve your LTV ratio and help you qualify for better interest rates. Consider ways to cut your expenses or increase your income to save more each month.
Find the cheapest deal:
Use a mortgage adviser to make sure you have the best deal. Mortgage advisers typically have access to over 100 lenders, giving you the widest possible choice.
Extend the term:
Extending the term of a mortgage will make the monthly repayments lower and more affordable. Doing this will make the mortgage more expensive overall, so it’s a good idea to take some advice and weigh up the options.
Get a joint mortgage:
This is not available to everyone but getting someone else to join you on the mortgage will improve affordability (presuming they are working). This could be with a standard joint mortgage, a guarantor mortgage or perhaps a joint mortgage with parents.
Can you get a £750,000 mortgage with bad credit?
Bad credit makes securing a mortgage more challenging, but not impossible. Specialist bad credit mortgage lenders may offer options, but often with higher interest rates and stricter terms.
Can you get a mortgage if you’re self-employed?
Yes, self-employed workers and company directors can get a mortgage, but they’ll need extra proof of income, such as two years’ worth of accounts or SA302 tax calculations.
Certain lenders will allow you to use retained profits to boost your income calculation.
How does a mortgage broker help?
A mortgage broker can help you find the best mortgage deals as they have access to a wide range of lenders, including specialist lenders who may be more flexible in their lending criteria. They can also help with the mortgage application process and ensure that you’re getting the best deal possible.
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.
Calculating your mortgage affordability is a crucial step in the home-buying process. To be eligible for a £750K mortgage, you would typically need to earn around £167,000 gross per year. This would drop to 150K for a lender that works with a multiple of 5x.
To improve your mortgage affordability, you can focus on improving your credit profile, reducing your outgoings, and saving for a larger deposit.
If you’re unsure about your affordability, it’s worth consulting a mortgage broker who can provide expert advice and help you find the best mortgage deals.
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.
