How much can you borrow?
There are numerous points to consider when trying to answer this question, so let’s look at the different area’s that lead to a lender deciding how much they will lend to you
Typically this depends on your income, monthly commitments, deposit level, and credit score. If you have debts on credit cards, personal loans, or car finance then lenders will take this into consideration when working out how much they think you can afford. The larger your deposit, the more relaxed lenders become and typically will lend you more vs your income as they feel they have a good buffer i.e. your deposit if something was to go wrong. If your income is made up of variable pay (commission/bonus) then they can still factor these in but all lenders have different rules on how much they will include and it depends also on how long you have been receiving your additional pay. Your income also needs to look like it is sustainable and you need to have a good credit score.
YourPropertyFinancial has strong relationships with all of their lenders, so will be able to help you secure the best possible terms with a lender who best fits your circumstance, so you can get the mortgage you need to buy or refinance your home.
Income multiples and affordability assessments
When it comes to obtaining a mortgage the 2 things that can make the biggest difference in what you can borrow are 2 things called Income multiples and your affordability assessment.
Let’s take a look at what exactly those 2 things are, how they impact what you can borrow and how you can improve your situation to take advantage of these.
Firstly income multiples come from a very simple place, in that you can reasonably be expected to be able to afford several multiples of your income. In today’s mortgage world the maximum you would be able to afford is 4-5 times your income though the exact amount is dependent on your income level, deposit, credit score, affordability assessment, and the lender you go with; your mortgage broker will be able to help advise on this.
Likewise, if your mortgage is to be in joint names then this would reflect both incomes.
Remember not all lenders can go up to this and it’s heavily dependent on your situation, not to worry though as your mortgage broker will be able to research the mortgage market for you to find the lender that can offer you the terms you are looking for.
Not all of your income is treated equally, remember as whereas your basic and fixed income like guaranteed bonuses and things like the London allowance is typically viewed as your “basic income” and therefore easy to evidence and understand; other parts of your income will likely need extra understanding to ensure you can use them for your mortgage.
Let’s look at the different parts of your income: Remember every lender has different income assessments and requirements and your mortgage broker will be able to help advise on the best lender for you.
If you’re employed then additional income could be some of the following:
- Monthly bonuses
- Annual bonuses
If you’re self-employed then your income is more viewed over the years:
- If you’re a sole trader then your latest 2 years accounts are used and usually, it’s an average of the 2 years.
- If you’re a director of a ltd company then your latest 2 years accounts plus your SA302 tax year overviews and tax calculations will be required. Lenders will typically average the 2 years provided the latest year declared income isn’t lower than the previous years and some lenders can even look at the latest years figures if they’re going up!
- Remember also as a self-employed individual and especially as a director of a ltd company it is your taxed earnings personally that are taken into consideration. Holding funds in your company (shareholders funds/ retained profit) won’t be included as until you’re personally taxed on this (you take this as salary or dividends) it is still the company’s money.
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Affordability assessments and stress testing
Affordability assessments and stress testing is the next main area where lenders will decide how much they will lend to you. Each lender has their very own mortgage affordability and stress testing assessment and there are multiple factors that can affect this and therefore affect how much you can borrow.
Since a very significant piece of mortgage regulation came into effect (the Mortgage Market Review-FCA) all lenders use income multiples as a general guide or maximum lending amount but the real decision on how much they can lend to you is based on your overall affordability assessment and stress test passing.
This can be a very complex area as there are so many factors that impact this and your mortgage broker will be an expert in this and will have the tools and knowledge to understand each lender’s assessment.
Each lender has its own stress test rate for calculating how much your payments would be in a “stressed” scenario. I.e rates climb to a certain level and with that new higher monthly payment due, do all the numbers still add up. The rate varies but can be as high as 7-8% in some cases.
The areas of your finances and circumstance that are typically factored into these calculations:
- If you are purchasing a house or a flat
- Your loan to value
- Loan amount requested
- Deposit level
- Term of mortgage
- Stress rates
- Number of applicants
- Number of financial dependants
- Variable pay (things like overtime & bonuses) are they monthly, quarterly, or annually
- Current and future credit card balance
- Current and future loan payments
- Current and future mortgages, both residential and buy to let
- Leasehold service charges and ground rent
- Maintenance payments due
- Overdraft balances
- Pension payments
- Childcare vouchers
- Car finance and Hire purchase
- Council tax
- School fees
- Existing life insurance/ Private health premiums
- Rent share if shared ownership
- Interest payments on help to buy
- Other regular committed expenditure
Mortgage lender criteria
This is another area that your mortgage broker will have extensive knowledge in and that’s mortgage lenders lending criteria.
Mortgage lenders decide themselves who, what, and where they lend their funds to and every lender has their very own specific criteria, or in other words, the things they will say yes to or simply no to.
Remember every mortgage lender (there are over 80 out there) will have their own version of their mortgage criteria so whereas one lender may say no to you with no room for appeal, another lender will happily lend to you with a smile! This is really where your mortgage brokers value shines through as they will know the different mortgage lenders criteria.
If your case doesn’t fit the mould or you’re on the borderline of a criteria point, typically if you applied directly to the mortgage lender, the bank’s computer systems (everything is automated typically to a point) could potentially decline you. Your mortgage broker will, however, have the contacts at each lender so even if on paper it would be a point the lender would typically say no to, your mortgage broker can get this pre-approved or overrule simply by the connections they have at the lender.
Read on to see how your credit score can impact how much you can borrow, the rate of interest charged and if you can even get accepted for a mortgage in 👉🏽“Your Credit Score”