How Much Can I Borrow for my Mortgage?
The amount you can borrow for your mortgage is dictated by your income and expenditure and the Lenders’ own affordability calculation models, but a recent article from the Daily Mail suggests housing takes up approximately one third of income for the typical UK family.
Over the years the amount Banks have been prepared to lend for mortgages has ebbed and flowed dependant on market conditions and appetite for risk at that time. There was a time in the mid 2000’s when more than 7 times annual income may have been acceptable in some circumstances and also it has been as low as 3 times annual salary in the past. Since the Mortgage Market Review of 2014 however it is seldom this “multiple of salary” rule that is applied – the Lenders now look much more deeply into your personal finances before deciding how much you can borrow to buy a home or Remortgage. Thus, the factors you need to consider are:
- How much will the lender say I can borrow for my mortgage?
- How do I know if it’s affordable?
- What if interest rates go up in the future?
How much will the lender say I can borrow for my mortgage?
As mentioned above, the way lenders calculate your borrowing capacity (often referred to as your affordability) is generally much more sophisticated these days than of old. Lenders used to work off simple income multiples of, say 3 times your gross annual salary, or 2.5 times your joint income. Nowadays they all have affordability calculators which are often quite different from lender to lender. As the complexity of the way people are paid has increased, so the lenders also have differences in what income they accept and what they don’t. For example, if you’re in a job where you earn a lot of overtime or bonus or commission, some lenders will take much more of this into account than others; some lenders will take certain benefit income such as child tax or working tax credits into account where others won’t. Similarly, if you’re self-employed or have set up your own limited company, different lenders will assess your income in different ways which can result in the same customer being assessed to have widely varying affordability levels from different lenders. Finally, factors such as the product that you want to take and the term of years you want to borrow the money over can all impact upon the overall affordability. Finally, lenders will deduct other regular outgoings such as personal loan payments, maintenance payments or credit card bills from your salary before assessing your affordability. Thus, whilst many lenders or brokers will have a “rule of thumb” figure that is usually somewhere between 4 to 4.5 times an annual income, this is just a quick guideline and you should always check with your broker for more accurate figures based on your specific circumstances.
How do I know if it’s affordable?
Lenders generally aren’t daft. They don’t want to be seen to be lending you more money than you can realistically afford and thereby put you under unnecessary financial strain. Therefore, if you pass a lender’s affordability calculator that’s a pretty good indicator that you should be OK. That said, we’ve already seen that the assessment of affordability can vary significantly between lenders, so it’s always worth completing your own budget planner to ensure that you have the security of knowing that, whatever the lender may say, you’ve done your own assessment. Remember, owning your own home is not just about paying the mortgage. Factor in associated costs such as council tax, utility bills and any other committed payments such as personal loans or insurance premiums and your regular food and drink bill at the supermarket. Be realistic and include everything that you’ll want to retain in order to maintain your chosen lifestyle. Deduct your other outgoings from your take home monthly pay and, if what you have left is more than enough to meet your mortgage payments, then you should be OK. If it’s not, you have a choice; either make savings or sacrifices from your outgoings in order to help you buy the home you want, or look for something smaller!
What if interest rates go up in the future?
The UK has seen an unprecedented period of interest rate stability in recent times. It is over seven years since the Bank of England has amended its Base Rate but with recent events many people fear the uncertainty that may come with future rate increases. If you complete a budget planner, you should be able to gain some idea of how much you can afford and you could therefore factor in possible increases to ensure your mortgage will be affordable both now and in the future. If you’re in any doubt, the key to future stability can be found in fixed rate mortgages where, as the name implies, the rate you pay, and thus your monthly repayment, is fixed for a defined period of time. Generally speaking, the longer you fix for, the higher the rate (and monthly repayment) is likely to be, but you might consider that to be a price worth paying for the peace of mind it brings.
Wayne Dewsbury – Mortgage Broker