Figuring out how much you can borrow for a mortgage can feel like solving a puzzle with missing pieces.
One of the biggest questions many home buyers face is whether mortgage lenders look at what you earn before tax (gross income) or after tax (net income).
This guide will clear up exactly how mortgage lenders assess your income, the differences between employment types, and how to get an accurate picture of your borrowing potential.
What Income Do Mortgage Lenders Actually Look At?
The short answer is that mortgage lenders look at your gross personal income.
This is your earnings before tax, National Insurance and other deductions come out.
Using gross income gives lenders a consistent starting point for all applicants. It doesn’t matter whether you’re a basic rate taxpayer, higher rate taxpayer, or have personal tax arrangements – everyone begins from the same foundation: their pre-tax earnings.
Most lenders start with basic income multiples – perhaps 4 to 4.5 times your annual gross income. So if you earn £50,000 a year before tax, you might initially qualify to borrow between £200,000 and £225,000.
Certain occupations, such as accountants and solicitors are classed as professions, with lenders offering higher amounts via a professional mortgage.
But don’t start viewing properties right away!
While calculations start with your gross income, that’s just the beginning. Your actual borrowing potential depends on your employment status, other income sources, and existing financial commitments.
Lenders also conduct affordability checks based on your monthly outgoings, which is where your net income becomes relevant indirectly.
They need to ensure you can comfortably make repayments even if interest rates rise, looking at what you have left after tax and other essential spending.
Gross vs Net: How Much Difference Does It Make?
To illustrate just how much your borrowing potential differs when using gross versus net income calculations, let’s compare the two approaches with a practical example.
A Real-World Comparison
Meet Sarah, who earns £45,000 per year before tax. Here’s how her borrowing potential would look under both calculation methods:
Using Gross Income (What Lenders Actually Do)
Annual salary: £45,000
Typical income multiple (4.5x): £45,000 × 4.5 = £202,500 maximum loan
If Lenders Used Net Income (Which They Don’t)
Annual salary: £45,000
After tax and National Insurance: ~£34,622 per year
Same income multiple (4.5x): £34,622 × 4.5 = £155,799 maximum loan
The difference is striking, £46,701 less borrowing potential if lenders used net income. That’s enough to completely change which properties Sarah could consider, potentially ruling out entire neighbourhoods or property types.
How Different Types of Employment Affect Income Assessment
Your employment status changes how mortgage lenders assess your income.
Each type of employment comes with its own nuanced assessment methods and documentation requirements.
PAYE Employees
If you’re employed through PAYE, you’ll find the income assessment process pretty straightforward.
Lenders look at your basic salary as shown on your payslips and employment contract. The stability of permanent contracts appeals to lenders, with most wanting to see you’ve been in your current job for at least 3-6 months.
Don’t worry if you’ve recently started a new position – many lenders will still consider your application, especially if you’ve stayed within the same industry.
What matters most is demonstrating a reliable and predictable income stream.
For your application, you’ll need to provide:
- Your last three months’ payslips
- Your latest P60
- Your employment contract
- Recent bank statements showing salary payments
- An employer reference (if you’ve recently changed jobs)
Lenders check for consistency in your income pattern and verify that the amounts match what you’ve declared. Some are cautious about lending during probation periods, though many show flexibility if you have a solid employment history in your field.
Sole Traders
As a self-employed sole trader, you’ll face more detailed scrutiny of your finances. This isn’t because lenders want to make things difficult, but because self-employed income fluctuates more than salaried income.
Lenders will examine your tax calculations and tax year overviews from HMRC (commonly known as SA302 forms) from the last 2-3 years.
Rather than focusing solely on your most recent year, they’ll usually calculate an average of your net profits over this period. This approach ensures that one particularly good or bad year doesn’t disproportionately affect your borrowing power.
For your application, you’ll need:
- SA302 tax calculations for the last 2-3 years
- Tax year overviews from HMRC
- Business bank statements
- Evidence of ongoing contracts or work (especially for newer businesses)
Many lenders also value an accountant’s reference as supplementary evidence of your business health and income stability.
This can be particularly helpful if your business has weathered unusual circumstances such as the pandemic or economic downturns.
Limited Company Directors
As a limited company director, your income assessment works differently again.
Lenders understand that you will probably pay yourself a modest salary and take dividends for tax efficiency. They will consider both salary and dividends when calculating your income, while some might also factor in retained profits within the company, though approaches vary between lenders.
For your application, be prepared to provide:
- Company accounts for the past 2-3 years
- Personal tax returns
- Business and personal bank statements
- Evidence of dividend payments
- Company tax calculations
The mortgage market has evolved to better understand company director finances.
Many lenders now recognise that business owners often show lower personal income on paper for tax reasons. Some specialist lenders have developed more flexible approaches to assess your true income, looking beyond headline figures to the overall financial health of your business.
Contractors and Freelancers
If you work as a contractor or freelancer, your income can be based on your gross daily or hourly rates multiplied by a standard working year (usually 46-48 weeks).
This approach can work in your favour, as some lenders have specialist contractor policies that result in more generous calculations than if you were treated as conventionally self-employed.
For your application, you’ll need to provide:
- Current and previous contracts
- Evidence of contract renewals
- Business bank statements showing payments
- Tax returns and calculations
- CV or work history in your field
Demonstrating resilience through economic challenges can strengthen your application.
Lenders are often impressed by contractors who maintain consistent income during difficult market conditions, as this suggests stability and adaptability – qualities that make you a lower-risk borrower.
How Mortgage Lenders Calculate Affordability
Understanding the affordability calculations helps explain why two people with identical gross incomes can be offered very different mortgage amounts.
The Affordability Assessment Process
As explained above, lenders use your gross (pre-tax) income as a basis for working out your maximum mortgage.
They then use a calculation that determines your mortgage affordability, this is your ability to actually make the mortgage payments each month.
This looks at your likely disposable income after essential outgoings, including tax and National Insurance, to determine how much you can comfortably repay each month.
Most lenders also conduct ‘stress testing‘ – checking that you could still afford repayments if interest rates rose by 3% or more above the initial rate. This buffer helps protect both you and the lender from future rate rises.
Financial Commitments and Lifestyle Costs
Fixed financial commitments are included in these calculations, reducing your affordability.
Credit card minimum payments, loan repayments, and other debts are deducted from your disposable income. For credit cards, lenders often assume a monthly payment of 3-5% of the outstanding balance, even if you’re currently paying less.
The number of dependants you have affects affordability too. Children mean additional expenses, so someone with three children could be offered a smaller mortgage than a single person with the same income.
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How Different UK Lenders Approach Income Assessment
The variations between lenders create opportunities for borrowers with non-standard income situations.
High Street Banks vs Building Societies
High street banks tend to have the strictest criteria but may offer competitive rates for those who fit their mould. They might be hesitant with complex income structures or might only take a modest percentage of variable elements like bonuses.
Building societies frequently take a more flexible approach, sometimes considering cases on an individual basis rather than applying rigid rules.
Some have specific policies for certain professions, such as teachers or healthcare workers, recognising the stability and progression in these careers.
Specialist Lenders
Specialist lenders fill gaps in the market by catering to specific income situations.
Some focus on contractors, offering more generous income calculations based on day rates. Others specialise in complex self-employed cases, including newly self-employed applicants or those with just one year’s accounts.
Income multiples vary significantly between lenders, while many cap loans at 4.5 times income, some offer up to 5.5x or even 6x for higher earners or certain professions. These higher multiples might come with stricter affordability checks or require larger deposits.
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How to Maximise Your Borrowing Potential
With some planning, you can improve your position before applying for a mortgage.
Timing Your Application
Timing your application right can make a significant difference.
Consider waiting to apply until after a pay rise or contract renewal, giving you the strongest possible income position. For self-employed applicants, timing applications after a strong trading year can boost your borrowing power.
Managing Your Debts
Reducing other unsecured debts before applying can dramatically increase your mortgage potential. Paying off credit cards, loans or car finance frees up disposable income in lenders’ affordability calculations.
Avoid taking on new financial commitments in the 3-6 months before applying.
New car loans or credit cards will reduce your borrowing capacity and very recent applications lower your credit score.
Structuring Your Income
For shareholding company directors, speak with your accountant about the balance between salary, dividends and retained profits.
While keeping money in the company might be tax-efficient, it could reduce your borrowing power unless you find a lender who considers retained profits.
Joint applications can increase borrowing power, but remember that lenders will check both applicants’ credit histories and financial commitments. If one applicant has poor credit or high debts, this might restrict rather than enhance your options.
Extending your mortgage term will reduce the monthly payments, improving affordability calculations. While this increases the total interest paid over time, you can often make overpayments later when your finances improve.
While these ideas are tried and tested, seek advice from an experienced mortgage broker before making any decisions.
Is a self-employed mortgage based on gross or net profit?
So, you’re self-employed and looking for a mortgage. But what income figure do lenders need when you work for yourself?
How a Mortgage Broker Can Help
Solving the complexities of income assessment is where mortgage brokers truly prove their worth. Their job is not just to find you the right mortgage, they will also provide advice and guidance on how to do it.
Access to Specialist Lenders
Brokers have up-to-date knowledge of different lenders’ criteria, including which ones are most accommodating for specific income types or employment statuses.
This saves you from wasting time on ‘hopeful’ applications that are likely to be rejected.
They can match your specific income profile to the most suitable lenders.
If you have a complex income structure with basic salary, overtime, bonuses and perhaps rental income, a broker will know which lenders will give you the most favourable assessment.
Expert Presentation of Your Income
Brokers understand how to present your income in the best way. For example, they will know that certain lenders have specific policies for contract workers that result in higher borrowing potential than being assessed as purely self-employed.
Many have access to lenders who don’t deal directly with the public.
These ‘broker-only’ lenders often have more flexible criteria for non-standard income situations, offering options you wouldn’t find anywhere else.
Time and Effort Savings
Brokers can save you significant time by handling the paperwork and liaising with lenders, particularly valuable for self-employed applicants, small business owners and company directors.
They can also negotiate with lenders on aspects of your application that might fall outside standard criteria, potentially securing exceptions that wouldn’t be available if you applied directly.
Next Steps
While mortgage lenders do start their calculations with your gross income, the full picture is far more nuanced.
Your employment status, income structure, and existing financial commitments all play important roles in determining how much you can borrow.
Before you start house hunting, getting some expert advice on your situation.
An accurate assessment of your borrowing ability will save you from disappointment and wasted time viewing properties beyond your reach.
For personalised advice on how your income will be assessed by different lenders, speaking with a mortgage broker is your best next step.
Frequently Asked Questions
Yes, mortgage lenders start their assessment with your gross income (before tax). However, they’ll also conduct affordability checks that indirectly take into account your net income and outgoings.
For employed applicants, lenders typically ask for 3 months’ payslips, your most recent P60, and bank statements showing salary payments. Self-employed applicants usually need to provide 2-3 years of tax calculations and tax year overviews (SA302 forms).
Student loan repayments won’t reduce the gross income figure used for initial calculations, but they will be counted as a monthly commitment in affordability assessments, potentially reducing your borrowing power.
Importantly, this only happens once your income is high enough to actually trigger the student loan repayments.
Most lenders use income multiples between 4-4.5 times your annual gross income as a starting point. Some lenders offer up to 5.5x or even 6x for higher earners or certain professional occupations.
Most mainstream lenders prefer at least 2-3 years of accounts for self-employed applicants. However, some specialist lenders will consider applications with just one year’s accounts, especially if you have a strong deposit or were previously employed in the same industry.
For joint applications, lenders will add together both applicants’ incomes and then apply their income multiple. However, the affordability assessment will consider both applicants’ financial commitments, which could limit borrowing if one person has significant debts.
