When researching a new mortgage, it’s important to know how your salary impacts the deals you may be offered. Whether you’re a first-time buyer, home mover or looking to remortgage, understanding how mortgage lenders assess your income can help you make informed decisions.
Salary will not necessarily have an impact on the mortgage rates you’re offered. However, salary and deposit amount will impact your affordability for a mortgage and how much you will be able to borrow.
In this blog, we’ll explain how lenders consider annual income in their affordability assessments and provide advice on securing the best possible deal for your financial situation.
For personalised advice from a mortgage adviser, please contact Goldmanread.
What is a mortgage rate?
The terms ‘mortgage rate’ and ‘mortgage interest rate’ are interchangeable. Both refer to the amount of interest charged on a mortgage. Different types of mortgage rates are available to suit different needs.
There are various types of mortgage rates, as follows:
- Fixed-rate
A fixed rate means the interest rate will stay the same for a specific period, e.g., 2 or 5 years. This is an attractive option to many as it guarantees predictable monthly payments. - Variable rate
A variable rate is just that – it can move up and down based on market conditions. Borrowers can benefit from potentially lower initial rates and savings, but rates can rise, making this a less financially predictable option.
There are various types of variable rate mortgages, as follows:
- Base rate linked – the mortgage rate is directly linked to the Bank of England base rate and will be charged at a percentage over the current rate.
- Standard Variable-Rate mortgages –These are mortgages in which the interest rate can change at the lender’s discretion, typically influenced by the Bank of England’s base rate. They are typically the highest rate and are where lenders make most of their profit.
- Discounted rate mortgages –These are typically charged at a discount off of the lender’s Standard Variable Rate for a specific term, e.g., 2 years.
What factors affect mortgage rates?
A number of factors affect the range of mortgage rates available in general and the rates available to borrowers depending on their financial situation.
Credit score
One key factor lenders consider is the borrower’s creditworthiness. If there is a history of adverse credit, e.g., missed payments, County Court Judgments, defaults, etc., lenders will likely charge higher mortgage rates to reflect the extra level of risk involved.
Inflation
The Bank of England controls inflation by changing the interest rate. When inflation goes up, they increase rates to take money out of the economy. When the Base Rate goes up, it directly affects the UK mortgage market, and mortgage rates also increase.
The opposite is also true: when inflation falls, the Base Rate falls to push more money back into the economy. That is generally when the most competitive mortgage interest rates are available.
Loan term
Typically, the length of the mortgage term impacts monthly repayments. The longer the term, the lower the monthly repayments. Do bear in mind that an extended mortgage term will not actually be cheaper in terms of the interest payable, as you are simply extending the mortgage over a much longer period.
Deposit amount
Generally, the higher your deposit, the more competitive the rate you will be offered. This is because a higher deposit (or Loan to Value) means less risk for the mortgage lender.
How much mortgage can I get based on my salary?
Most mortgage lenders have their own affordability assessment, which takes into account not only your salary but many other factors, such as your credit score and deposit amount.
As a general rule of thumb, lenders will offer 4-5 times your annual income amount. Some lenders will consider higher multiples, such as 5-6 times, but this tends to be aimed at niche markets, such as professionals like Lawyers, accountants, and doctors.
How does your salary impact your mortgage application?
Lenders use salaries to assess affordability, taking into account any current or future commitments. They also look at the following:
Job stability
Most lenders want to see a consistent work history when assessing a mortgage. They may also check whether the applicant is in a probation period.
For self-employed mortgages, most lenders require evidence of three years’ income, although some will consider one to two years.
Debt to income ratio
The debt-to-income (DTI) ratio measures your monthly debt payments compared to your gross monthly income. Lenders prefer a lower DTI ratio because it suggests the applicant has sufficient income to cover the monthly minimum amount required for the mortgage. If an applicant is classed as over-indebted, the mortgage will likely be declined.
Creditworthiness
A good credit score will certainly help your application. An adverse credit history does make it more challenging to get a mortgage, but some specialist lenders consider bad credit mortgages, especially if you have a larger deposit.
It’s important to check your credit report before you make a mortgage application and take appropriate measures to improve your score, e.g. making repayments, reducing balances and correcting errors.
Mortgage repayments
Your monthly mortgage repayments will be influenced by a combination of mortgage amount, deposit and the type of interest rate chosen.
Does a higher salary guarantee a lower interest rate?
A higher salary will definitely have an impact on the loan size but won’t necessarily impact the interest rate. That will be determined by factors such as creditworthiness and deposit amount.
How can I increase the amount I can borrow on a mortgage?
If you apply for a joint mortgage with a partner or spouse, your combined salaries will be considered, meaning you will be offered a higher multiple. If you are single, you could consider a joint mortgage with a friend, but be mindful that some lenders may offer a lower multiple for a multiple-occupancy home, i.e., a property with more than one family residing in it.
You can also improve your borrowing potential by saving for a bigger deposit, reducing debts, extending the mortgage term and improving your credit score.
A Joint Owner Sole Proprietor (JOSP) mortgage or a guarantor mortgage could also be options, where a family member shares responsibility, thereby improving your borrowing capacity.
Get in touch to find a mortgage in line with your salary
As an experienced mortgage advisor, Goldmanread has access to the whole market and can identify the best mortgage lenders for your financial situation, including those who offer higher income multiples.
Contact us today to discuss your mortgage needs.
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