Maximum borrowing is a complex issue in the current market.
The days when a mortgage lender would simply work on a multiple of before tax income have long gone.
The maximum lending calculation is far more complex in the current market as the 2014 mortgage market review made lenders directly responsible for ensuring that residential mortgages are affordable to borrowers.
This enhanced responsibility, and more importantly, accountability to the Financial Conduct Authority for affordability, makes lenders more sensitive than ever to mortgage affordability issues.
Lenders consider a wide range of factors with regard to assessing maximum mortgage lending. We cover many on this page, but for the reader that wants a ballpark guide, an overview is set out below.
Affordability- ballpark figures
Building societies – tend to be more conservative and around 3.5 times joint income as a reasonable guide.
High Street banks – around four times joint income.
Five times joint income can be achieved in some circumstances with some lenders (for example, for Professional applicants).
Please note – these ballpark figures assume no other lending in the background or other regular costs such as childcare.
These notes are for guide purposes only, contact us for a personal assessment based on your own circumstances.
For higher lending figures you will need to use the services of an independent mortgage broker such as A Mortgage Now.
How mortgage affordability works – Mortgage lenders in today’s market have systems to calculate income after tax, and each will have a percentage of that net income that they would consider sensible to be used for mortgage payments. Obviously, available net income is greatly affected by each applicant’s situation and domestic arrangements.
For example, a single man will have considerably less strain on his income than a married man with three children to support.
Similarly, an individual with several thousand pounds on credit cards and recently arranged car finance, will have less net income than any individual on the same salary who takes the bus and does not use credit cards.
Net income is commonly also affected by state benefits such as child benefit, tax credits, and disability living allowance. Some lenders will consider some or all of these benefits, some will not consider them at all.
The question of day-to-day outgoings such as food, utility bills, travel expenses, insurance, and entertainment, is more difficult to assess. Each of us have our own tastes and preferred way of spending our money. It cannot be assumed that a Waitrose shopper, is spending more on food than a Lidl shopper.
Nor that a borrower in their 20s will necessarily spend more on entertainment than a borrower in their 40s.
Some lenders will therefore use a budget planner completed by the individual applicant(s) to assist their calculations. There is provision within Financial Conduct Authority legislation for a lender to issue assumed levels of day-to-day outgoings based on the applicant profile. Indeed, this is a process that some mainstream mortgage lenders have been using for some time.
Items required to assess mortgage affordability – In addition to an overview of your personal circumstances, a mortgage lender will require some or all of the following background information to assess your maximum borrowing potential at application stage.
- Proof of income – wage slips, P60s, or accounts and SA302’s for self-employed applicants.
- Bank statements – to assess spending patterns and monthly outgoings.
- Benefits statements – to assess state benefit income.
- Rental agreements – to assess buy to let properties in the background.
- Maintenance agreements – to assess maintenance income.
Items commonly missed when considering affordability issues
Some regular monthly costs can be overlooked by the applicant when they submit a mortgage application – they are rarely missed by the lender. Items we regularly see come into this category include:
Pension contributions – paid direct from salary, the effect of these deductions is not immediately noticeable to the applicant. The lender will spot these on the wage slips and make an allowance for them.
Childcare costs – whenever a lender sees dependent children on an application, they will ask about the cost of childcare or education.
Maintenance costs – in the same vein, a divorced applicant may have maintenance costs for their children.
Loans taken in personal names paid by a business – many self-employed applicants will have lending in their own name which is paid for by their business.
Stress testing – Stress testing is a part of the process carried out by lenders since the 2014 mortgage market review.Under stress testing, an underwriter would consider whether a borrower could cope with maintaining payments following changes to their circumstances, or if payment rates were to rise. For stress testing, a lender will refer to a recognised industry projection of potential future mortgage rates.
How to establish how much you can borrow – In today’s world, it is part of the mortgage broker’s responsibility to establish whether an applicant fits a mortgage lender’s underwriting criteria. Part of that assessment is to establish whether the client fits the mortgage lender’s affordability profile. For this reason, your mortgage broker is best placed to assess your maximum mortgage affordability. Each lender distributing mortgage products through mortgage brokers will provide the broker population with a system for checking maximum affordability for an applicant. These are typically online calculators that can be assessed by the broker. The mortgage lender will often take steps to train the broker on how to use the calculator as each will have its own particular nuances such as in what section to input what type of income or outgoing.
Affordability and credit score – Credit scoring is widely used in the UK mortgage market and this is a system where a lender allocates points to an applicant for each element of their application profile with the intention of assessing how well the prospective borrower fits with the lenders offering. Clearly, an applicant that has a higher level of credit score points is more attractive to the lender and this can often be demonstrated by increased maximum affordability for the high-scoring applicant, and a reduction for the lower scoring applicant.