It’s a question that I’m asked all the time when it comes to sitting down with new customers; how much can I borrow? So lets dive straight in and look at how mortgage lenders assess how much you can borrow.
The first thing to say is that all mortgage lenders have their own way of working out how much of a mortgage they’ll advance to you, based on their own lending and affordability criteria. This can vary quite a lot from lender to lender. Every mortgage provider has their own calculator, but they’re only ever as accurate as the information that is put into them which is why it’s important to establish from the outset what your income looks like; are you employed or self-employed, do you have credit committments such as loans & credit cards, do you get overtime,bonuses, car or shift allowances, attendance payments or are you on a fixed term contract or a CIS sub-contractor, do you have any dependent children or adults that you financially support, and if so how many and are there childcare costs to take into account?
All these variables have to be taken into account to make sure the most appropriate lender is chosen for your particular circumstances – it’s important to note at this point that the ‘cheapest rate’ may not be the right mortgage lender for you if they won’t give you the size of mortgage that you need to buy the home you want. This is why as independent mortgage brokers we work to a process that filters out, step by step the lenders that won’t meet your needs down to the ones that will, and of the lenders that are filtered into that final group it’s then the case of selecting the most appropriate deal that’s within those.
So now we’ve set the stage lets get into the way mortgage lenders actually work out how much you can borrow.
There’s often an assumption that a mortgage lender takes your annual income and mulitiples this by 4 – 5 times to give you the mortgage amount that can be loaned, however this is very much an oversimplification. Since 2014 mortgage lenders have been required to perform affordability tests which include ‘stress testing’ the amount they think you can afford taking into account possible changes to your circumstances, such as having children, redundancy and the possiblility of a change of job, along with factoring in any current credit commitments you might already have.
As an example lets take a fictional couple Mr A & Mrs B, they have 2 children who are both at primary school. Their outgoings are that Mr A has a car loan of £250 per month and Mrs B has a credit card balance of £3500. They are both employed and earn £21,000 a year. So based on those figures what would 3 mainstream mortgage lenders offer them? Lender 1 would offer a maximum loan of £144,155, lender 2 would offer a max loan of £166,900 and lender 3 would offer a max loan of £188,580. As you can see between the lowest and highest is quite a big difference (£44,425) given that we’re working with exactly the same numbers & scenario – this illustrates why you shouldn’t really trust those online calculators on various websites that say they can tell you how much you can borrow.
Now lets assume Mr A & Mrs B want to buy a home that costs £200,000 and they have a 10% deposit available of £20,000 and therefore need to borrow £180,000. Lenders 1 & 2 might have the best rates but that is irrelevant if they won’t give them the size of mortgage the need to buy the home they want. Therefore we would make an application to lender 3 who will give them the mortgage that is required.
So what’s the moral of the story here then? Well, it’s that you shouldn’t really trust those online calcultors and that if you want to know exactly how much you can borrow on a mortgage, the only way to do it and have confidence is to sit down and talk with a qualified mortgage professional, go through your individual circumstances and let them guide you as to your options.
Of course as always if you need to talk about anything mortgage or property related then feel free to get in touch.
