What size deposit will I need?
It's still entirely possible to get a mortgage with a 5% deposit. A 95% loan-to-value (LTV) deal with one year's submitted accounts may be possible, but the majority of lenders will only go to 85%-90% LTV.
All providers work on a tiered LTV basis, whereby the max loan-to-value decreases as the mortgage amount increases above a certain threshold. However, this doesn't usually become an issue until you're borrowing £400,000 or more.
For a self-employed remortgage, most lenders allow a maximum loan to value of 90 percent. For buy- to-let purchases, 75 percent is fairly standard.
Deposit requirements for leasehold properties
Another factor that can affect the maximum LTV, is the type of property you are buying.
You'll sometimes need to find a larger deposit to buy a flat or maisonette. Compared to house purchases, lenders consider leasehold properties a weaker form of security against the loan.
How much deposit you'll need depends on the loan company, but 10-15% is quite common.
You'll find the best mortgage rates and deals are reserved for borrowers with larger deposits of 25-40 percent, but there are still excellent rates available at higher LTV's.
How much can I borrow as a company director?
Assuming you have a large enough shareholding in the company to be classed as a self-employed director, not an employee, around 4.5 times either single or joint income.
Either your salary and dividends or salary and net profits will be used to calculate your income and maximum borrowing figure.
Salary and net profit from the latest year's company accounts is accepted by some lenders. One or two providers use pre-tax net profit averaged over the last two year's accounts.
Let's take Pete as an example.
Pete is a director and 100% shareholder (a.k.a participator) in a bakery business in Wrexham. He pays himself an annual salary of £12500 and draws £37500 p.a. in dividends. With an annual income of £50000, he could potentially borrow up to £225,000 as a sole borrower.
If Pete was making a joint application and his partner earned £45000, their combined income of £95000 would give a maximum borrowing figure of £427,500 on a 4.5 x income multiple, subject to an affordability assessment and credit check.
Borrowing more if you're a high earner
Banks and building societies are often willing to use larger income multiples for high-earning company directors.
It's possible to borrow 4.75 or 5 times income, whilst a few lenders will go to 5.5 or even 6 times earnings for in exceptional circumstances.
Each provider has its own definition of what constitutes a high earner, but £75000 or more per annum in salary and dividends is a good benchmark.
Always weigh up carefully if borrowing more based on a higher multiple of earnings is prudent.
How is affordability assessed?
All maximum borrowing figures are subject to affordability assessments by the lender's underwriters.
Credit score, ongoing credit commitments, financial dependents, and other committed expenditures like child maintenance and spousal support, are all assessed to determine how much you can afford to borrow.
The FCA requires all mortgage providers to carry out a 'stress test' of the borrower's ability to service the monthly mortgage payment at a much higher interest rate.
Currently, the stress test rate is set at 3% above the lender's Standard Variable Rate (SVR), though this is set to be reduced to 1% in August 2022.
So as you can see, there are many factors lenders have to consider in determining how much you can borrow, and your earnings are just part of the equation.
I'm a contractor and use my Limited company to receive my earnings. How much can I borrow?
For contractors, the situation is slightly different, as in many cases providers your day rate can be considered when assessing your income, rather than salary and dividends.
Let's take Joanne who works 4 days a week as an IT contractor. Her day rate is £400.
Most lenders will calculate Joanne's earnings based on 46 work weeks per year. E.g 46 x 4 x 400 = £73600. On a 4.5 income multiplier, her maximum borrowing amount could potentially be as much as £331,200.
How has the cost of living crisis affected mortgage affordability?
Since the Bank of England started raising the base rate in December 2021, and the cost of living crisis hit in 2022, lenders have progressively tightened affordability criteria.
As each provider uses it's own methodology to calculate a maximum borrowing amount, you may not necessarily be able to borrow the full 4.5 Loan-to-Income multiplier.
