How much can I borrow?
Calculating how much you can borrow is no longer a simple matter of multiplying your income to arrive at a figure, lenders now use a more sophisticated affordability assessment system
By Nick Partington
Before applying for a mortgage, you need to think about more than just the monthly mortgage payments, you need to think about income and expenditure now and also if interest rates rise or your circumstances change.
How lenders assess what you can afford
In the past, mortgage lenders based the amount you could borrow mainly on a multiple of your income.
Typically they have would have used between 3 and 5 times your income.
So if your combined income was £40,000, you could borrow between £120,000 and £200,000
Whilst this is still a useful guide, lenders now use a more complicated method of calculating affordability that also takes into account committed expenditure rather than just income.
They will assess what level of monthly payments you can afford, after taking into account various personal and living expenses as well as your income.
This is called an affordability assessment.
The lender will also look ahead and ‘stress test’ your ability to repay the mortgage taking into account the effect of possible interest rate rises and possible changes to your lifestyle, such as:
• redundancy
• having a baby, or
• taking a career break.
If the lender is concerned that you won’t be able to afford your mortgage payments in these circumstances, they might limit how much you can borrow.
“Mortgage Calculators often will only multiply your salary by a set number and do not take into account your circumstances, we find clients can be disappointed when they find out the amount that they can borrow, so why not contact us and get the real picture.”
What the lender will look at
When working out how much you can afford to borrow, the lender will want to see:
1. Your income
• your basic income
• income from your pension or investments
• income in the form of child maintenance and financial support from ex-spouses
• any other earnings you have – for example, from overtime, commission or bonus payments, or a second job or freelance work.
You will be expected to provide payslips and bank statements as evidence of your income.
If you’re self-employed you will need to provide:
• bank statements
• business accounts
• details of the income tax you’ve paid.
2. Your outgoings
• credit card repayments
• maintenance payments
• insurance – building, contents, travel, pet, life, etc
• any other loans or credit agreements you might have
• bills such as water, gas, electricity, phone, broadband.
The lender might also ask for details of your living costs such as spending on clothes, basic recreation, and childcare.
They might also ask to see your recent bank statements to back up the figures you supply.
3. Future changes
The lender will assess whether you will be able to pay your mortgage if:
• interest rates increased
• you or your partner lost their job
• you couldn’t work because of illness
• your life changed, such as having a baby or a career break.
It’s important that you think ahead and plan how you’d meet your payments.
You can help to protect yourself against unexpected drops in income by building up savings when you can.
Try to make sure it contains enough for three months’ outgoings, including your mortgage payments.
You may want to consider mortgage payment protection insurance to pay the mortgage if you can’t work due to an accident or sickness.
Small deposit or lower income
If you only have a small deposit or are on a low income, there are schemes to help you get on the housing ladder.
To find out more read our guides or visit the money advice service – Help to Buy and other housing schemes.