Calculating how much you can borrow

Though it is best to use a mortgage calculator to get a guideline indication of how much you can borrow, you can also make the calculation manually if you are not near a computer.

For any individual who is looking to secure mortgage funding, the amount that you can typically borrow will vary from lender to lender and product to product, regardless of whether you are a contract, employed or self-employed worker.

As a general rule of thumb, you can typically borrow 4 times your gross regular annual income and where it’s a joint application the rule is 3.5 times the combined annual income.

Where one applicant’s income is significantly greater than the other it is also possible to base borrowing on three times the highest income plus the other income.

Calculation based on contracting income

The issue that many contractors have when they approach a mortgage lender is that lenders will usually fail to understand how the contractor is paid and as such will not take the contractors full earnings into consideration when reviewing their affordability for mortgage purposes.

Most contractors use one of many tax efficient methods to remunerate themselves, which can often mean that income can looks a lot less than it actually is when looked at from a high level. Lenders who are less flexible towards contractors will usually only take ‘conventional’ parts of contracting income such as salary and dividend draw into account when calculating how much they would be prepared to lend to you.

Our bespoke underwriting proposition offers a solution to any problems surrounding complexities in income, and allows contractors to maximise borrowing capacity when proving income. Essentially, contractors can annualise their daily rate so that full gross contract value is taken into consideration when assessing income.

The way in which a lender annualises your daily or hourly rate is usually dependent on the individual criteria of the banks and building societies. A general calculation is your daily rate x 5 x 46. Your daily rate will be multiplied by 5 as there are generally 5 working days in a week. Despite the 52 weeks in a year, the lender usually multiplies your weekly rate by a slightly lower multiple to account for holidays and sick days when you will not be paid. The multiples as mentioned above would then be applied to calculate how much the contractor can borrow.

An example of calculating borrowing capacity based on contracting income would be:

A contractor has a daily rate of £600. £600 x 5 = weekly rate of £3000. £3000 x 46 = annualised earning of £138000. This is then multiplied by 4 (again this would vary depending on the lender) to calculate the contractor’s borrowing capacity which is = £552,000. Therefore, based on their daily rate, the contractor should be able to borrow approximately £552,000, subject to their credit rating and lending criteria.


Next Steps

It is important to remember that the calculations mentioned in this article should only be used as a guideline amount. If you are looking for a more accurate indication of how much you can borrow, please contact us on 01489 555 080 to speak with one of our specialist contractor mortgage consultants directly. Our consultants will be able to apply their extensive knowledge of lending criteria to provide you with an accurate calculation of how much you can borrow based on a specific product or lender.
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