How Much Debt is Acceptable for a Mortgage UK?
, by Matt Stevens
Thinking about buying a home but also that your current debt could stand in the way? Well, you’re in good company because most prospective buyers have borrowing of some sort.
Mortgage lenders will look at the debts you already hold, alongside the amounts, so understanding how this factors into their decision is essential if you want to give yourself the best chance of being approved.
In this article, we’ll go over how lenders actually view debt and offer tips so that you can improve your application and so avoid unnecessary rejection. We’ll answer:
What is a debt-to-income ratio?
A debt-to-income ratio measures the proportion of your monthly income that goes towards repaying existing borrowing. The income figure used is your gross income, i.e., what you earn before tax and other deductions.
Put simply, this ratio helps lenders gauge how comfortably you’ll be able to manage further credit. The higher the percentage, the more stretched your finances will appear, which influences how risky your mortgage application is seen to be.
There are two types of debt-to-income ratio. Namely, the front-end ratio, which is the part of your monthly income that covers housing costs alone, and the back-end ratio, which represents the percentage of your income spent on all debts.
How do I calculate my debt-to-income ratio?
To calculate your debt-to-income ratio, you divide the total amount you pay each month towards your debts by your gross monthly income, including any benefits and bonuses.
Once you have this figure, multiply it by 100 to express it as a percentage. Say, for instance, you earn £2,000 a month and £500 of that goes towards debt repayments, the calculation would be £500 / £2,000. This leaves you with 0.25, or a 25% debt-to-income ratio.
What types of debt impact a mortgage application?
Lenders look at both the nature of your borrowing and the size of your repayments in relation to your income. Some debts carry more weight than others, therefore not all are seen in the same way:
Credit cards: Lenders specifically consider a figure slightly above the minimum monthly payment, and how responsibly cards are used makes a noticeable difference
Personal loans: Unsecured loans from banks or other lenders are taken into account in full. Short-term credit is viewed especially negatively and seriously damages your chances
Student loans: Because these are repaid directly from your salary before tax, lenders don’t see them as problematic, assuming your overall affordability is strong
Car finance: Monthly car payments are treated like any other fixed outgoing, however lenders recognise that cars are a necessity
Child maintenance and regular support payments: Any structured, ongoing financial commitments to children or dependants are included in checks
Current housing costs: Your existing mortgage payment, or rent if you’re not yet a homeowner, is taken into account, despite the latter not being a debt
Debt Management Plans: If you’re making payments under a formal or informal debt plan, lenders will factor these in and may be cautious depending on the circumstances
Overdrafts: Occasional use of an arranged overdraft is rarely an issue, but consistently relying on one shows financial strain
Council tax arrears: Outstanding council tax is treated as a priority debt and will raise concerns about your ability to manage essential expenses
It’s worth mentioning that lenders also distinguish between different forms of debt insofar as low-interest, low-risk borrowing such as student loans, and expensive, high-risk credit like payday loans. Likewise, any negative marks on your report, such as CCJs, IVAs, or bankruptcy, will weigh heavily in the decision-making process.
How much debt is acceptable for a mortgage in the UK?
There’s no single rule which applies here, as each lender uses their own criteria. That said, your debt-to-income ratio is a useful indicator and so, the lower the percentage, the more comfortable a lender will feel.
Generally speaking, a ratio under 20% is seen as very healthy, while figures around 30% are still considered low risk and will attract competitive interest rates. Many lenders become cautious once applicants exceed roughly 45%. As such, if your ratio is 50% or above, it’s best to reduce your borrowing before applying since approval will be less likely.
Context also plays a part in that the age and type of debt, how much it has been reduced by, and your broader financial profile ultimately determine the final decision. A strong credit score, steady income and a substantial deposit could even offset a higher debt-to-income ratio.
Can I get a mortgage if I have a high debt-to-income ratio?
Potentially, although your options will be more limited. Specialist lenders, in particular, will consider applicants with higher debt levels, provided there are other aspects which balance the risk (much like with bad credit mortgages).
In certain cases, homeowners choose to remortgage in order to release equity so as to clear their outstanding debts. This is what’s called a debt consolidation mortgage, where multiple debts are placed into a single loan and are thereby easier to manage.
This being said, lenders tend to cap the amount that can be used for consolidation at around 20% of the total borrowing. It’s equally important to consider affordability carefully, given that rolling unsecured debt into a mortgage means the borrowing is secured against your home, and your monthly repayments will increase.
How do I increase my chances of getting a mortgage with debt?
If your debt-to-income ratio is on the high side, then you can strengthen your mortgage application by avoiding more borrowing, reducing your existing balances, and exploring any opportunities to boost your income, like working overtime. A joint mortgage will also increase your affordability due to how they combine two incomes.
But, besides the obvious, it’s vital that you get advice from a mortgage broker because they’ll give you an honest view of how lenders are likely to interpret your circumstances and identify providers with more flexible criteria. As well as this, brokers negotiate directly with lenders, helping to present your application in the strongest possible way.
At The Mortgage Genie, our expert brokers work closely with lenders who consider those with higher levels of debt. We’ll talk you through every option and match you with a lender suited to your situation. If you’re interested, then be sure to give us a call at 01915809890. And why not see how much you could borrow up to today by using our mortgage calculator?
The above blog has information contained within which was correct at the time of publication but is subject to change.
FAQs
How important is my debt-to-income ratio when getting a mortgage?
Your debt-to-income ratio is important when getting a mortgage since it lets lenders judge whether or not you can comfortably take on additional borrowing. Nevertheless, each lender has their own standard, so the same ratio could be seen differently in two separate cases.
Can I remortgage if I have a high debt-to-income ratio?
Yes, but approval will depend on the lender’s individual criteria, and if your debt levels have gone up significantly since you first got your mortgage, then your current lender will be more cautious about offering a new deal.
Will my debt-to-income ratio be considered for a decision in principle?
Most lenders don’t assess your debt-to-income ratio at the decision in principle stage, yet some do. This means that even if your DiP is approved, your formal mortgage application could still be declined following a detailed affordability check.
