how much can i borrow mortgage self-employed

How much can I borrow?

When you start house-hunting, one of the first questions you will need to ask is, “how much can I borrow?”. Unfortunately there’s no simple answer. Every mortgage lender uses a different set of criteria to assess your application which means the amount you can borrow can differ. This isn’t helpful, especially when you need to know your budget. How then, can you get an estimate?

Getting an estimate is more straightforward if you are employed and you’ll find links to two of the best mortgage calculators later in this article. If you’re self-employed… the process is a little bit more tricky although not impossible if you have the right support. The lenders won’t make this simple for you, but at the end of the day, there’s nothing stopping you getting the same mortgage rates as everyone else if you jump through the hoops to get there.

Once you have your estimate of how much lenders will give you, it will be easier to set your goals for your dream home, start working on proving your income and making sure your credit score is in shape (we’ll be covering this next week).

Working it out

Your income and your deposit are the foundation of calculating the amount you can borrow. First though, spend some time considering your realistic monthly mortgage budget.

The old method of working out how much you can borrow was to simply multiply your salary by 3 – 5 depending on the strength of your credit score. However, from April 2014 affordability-based lending has been officially enforced, which means closer scrutiny over your spending habits to minimise the chances of default. Working out how much you can borrow is now more complex, with each lender having a specific formula for working out your affordability profile and the maximum they will lend.

Let me give you an example:

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Annual Income:
£35,000

Expenses:
Loan £200 per month = £2400 per year
Credit card £2,000 multiple 3% = £720 per year
Travel £250 per month = £3000 per year
Total = £6120

Total:
£35,000 minus £6120 = £28,880
Multiple 4.5 = Mortgage £129,960

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Every lender has a different multiplier and the only way to determine their criteria is to apply, which is where a broker can save you a lot of time, energy and hassle. Recently I submitted an application for a client only to be offered £190,000 by one lender and £240,000 by another, as an example. The trick is knowing who to approach based on both your affordability profile and understanding each lender.

To figure out how much our clients can afford monthly, we use the list attached below. The surplus is then used to calculate the maximum you can afford to borrow. To be exact, lenders will go through all your bank statements with a fine tooth-comb to check your figures.

Affordability Table

It seems simple: the more you can afford, the more you can borrow, but in some cases its just not that simple.

If you’re self-employed with multiple income sources, things can be a bit more complex. You may be able to easily afford a mortgage on your dream home based on your total income, but if your income is from multiple sources, then this can cause some issues for certain lenders. Some lenders won’t take into consideration dividends, for example, which could give some self-employed business owners the offer of a much lower mortgage loan because the lender ignores a significant portion of their income. Finding the right lender is therefore paramount when you’re self-employed.

The best way to find out your affordability when you’re self-employed, is to ask an expert who knows how to approach the lenders that will look at all your income as one.

The Best of Online Calculators

Here are two of the best online calculators we could find. They will both give you a rough estimate of what you can borrow but bear in mind that they rely on assumptions – your actual circumstances could mean that the real amount you can borrow is very different.

  1. From Martin Lewis’ Money Saving Expert – The Ultimate Mortgage Calculator. It relies on simple income multiples, but it’s a good place to start if you have no idea what you could get.
  2. This Mortgage Affordability Calculator from The Money Advice Service goes into a bit more detail, but again, your actual circumstances could mean lenders will offer you a different loan amount.

Recap

Follow these steps to understand how much you can (roughly) borrow:

1 Take a look at your income and outgoings to calculate how much you could afford and balance that against the price range for which you would like to aim.

2 Try out the simple calculators to get a rough idea.

3 Speak to a professional mortgage adviser who will be able to give you a better estimate of how much you can borrow, and give you some personalised advice.

4 Prepare for your mortgage application, paying particular attention to the income you are showing and your affordability profile.

5 Start your mortgage application…

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