How Much Money can I Borrow with a Mortgage?
Most mortgage lenders will lend a maximum of three times your income plus once the income of your spouse. On this basis a couple earning £20,000 and £10,000 respectively would be able to borrow £20,000 x 4 = £80,000 plus £10,000 x 1 = £10,000, ie a total of £90,000. These limits may seem over-cautious. They are not. They are sensible limits designed to prevent borrowers from over-stretching themselves.
A young couple who are both in secure employment may feel confident enough to borrow far more than this. However, they have no way of knowing what the future may bring.
- Interest rates might rise, causing their mortgage payments to increase enormously.
- An unplanned pregnancy might require one partner to give up work sooner than they had planned.
- Redundancy or illness could reduce the family's income without warning.
The risk of mortgaging yourself up to the hilt might be justified if:
- You have good reason to believe that your income will rise rapidly in the future.
- You are confident about the security of your employment.
- You have insurance to protect your income in the event of redundancy or illness.
- You have protected against the risk of interest rates rising by taking out a fixed rate mortgage.
In all other cases it may be safer to stick to the borrowing limits imposed by the mainstream mortgage lenders.
Treatment of Overtime and Commission Payments
A great deal of confusion is caused by the way that mortgage lenders treat overtime and commission payments. If your employer states that overtime or commission is 'guaranteed' most lenders will treat it as if it were basic salary. If it is not guaranteed, most mortgage lenders will only allow half its value when calculating how much you can afford to borrow. For example:
Miss A earns £10,000 basic salary plus £10,000 guaranteed commission. She can borrow 4 x £10,000 plus 3x £10,000, ie £80,000.
Miss B earns £10,000 basic salary and £10,000 non-guaranteed commission. She can borrow 4 x £10,000 plus 1.5 x £10,000, ie £60,000.
If any part of your salary is paid by way of overtime or commission, you need to check with your employer whether this will be described as guaranteed or non-guaranteed before you apply for a mortgage.