Ever wondered how mortgage lenders decide how much you can borrow? Greg Cunnington of Alexander Hall explains the number crunching process to help you gain a better insight into your potential borrowing power
The most common question we get asked as a mortgage intermediary by our clients is ‘how much can I borrow?’
It makes sense – after all, the amount of mortgage available to buyers is the primary factor in determining the size and location of property they can purchase.
Here we explain how much you can borrow, and how using an intermediary ensures you maximise your borrowing.
Mortgage lenders typically use two calculations when assessing how much you can borrow. The first is something called ‘loan to income’ and the second is affordability. Here’s a bit more detail about these two calculations.
Loan To Income (LTI)
Firstly, mortgage lenders will apply a maximum loan to income ratio (LTI) (often referred to as income multiples).
This is a calculation of the maximum you can borrow based on your ‘income’. This can vary significantly from lender to lender, typically ranging from 3.5 times your salary to 5.5 times in the most extreme circumstances.
A typical maximum LTI ratio is 4.5 times, which means if your total joint income was £60,000 you could in theory borrow a maximum of £270,000 for a mortgage. Intermediaries will often have access to higher LTI ratios from lenders.
There are a lot of variables that come into play for lenders when assessing the maximum LTI they will offer you.
High earners
Typically, lenders offer higher LTI for clients with more deposit (so a client with a 25% deposit may be offered 4.75 times their income, whilst a client with a 10% deposit may be offered four times their income).
Some lenders will often lend more to clients on higher incomes – this is because they are likely to have more surplus income after typical household expenses.
So, for example, one lender offers a higher LTI for clients that earn over £45,000 (up to five times, instead of 4.49 times). Another lender can offer a market leading higher LTI, up to 5.5 times, for clients who earn £100,000 or more and have a 40% deposit, needing a combination of both factors of high income and a large deposit.
Occupation type
Your employment type can also have an impact on this. We have access to some lenders that via intermediaries will offer a higher LTI, up to 5.5 times in some circumstances, for first-time buyers who are classed as ‘newly qualified professionals’.
These lenders target customers who are just starting out their careers – in fields such as law, accountancy or medicine. They will lend more based on the likelihood that these clients will see significant income rises in the coming years.
These maximum LTIs from lenders can change quite regularly, so it is important that you are speaking to a mortgage intermediary who will be able to stay on top of what lender is best for your circumstances.
For example, recently one major lender changed their maximum LTI to 4.49 times, from 5.5 times, which – for some buyers – could be quite a large difference in borrowing capability.
Mortgage lenders are also restricted in the number of mortgages they can offer over 4.5 times LTI due to a regulatory limit.
As such, they will often set harder criteria – or rules – customers must qualify for in order to obtain lending above this amount. This often means intermediaries have access to certain criteria or exclusive options which allow customers to borrow more.
Affordability
LTI, however, is just one part of how lenders assess how much you can borrow. Just as important, if not more so, are lenders’ affordability calculations.
This is why we always inform clients not to even browse properties online without first speaking to an intermediary.
So many factors can impact the borrowing you will be offered – therefore just using a crude loan to income calculation will often be significantly different to the actual amount you can borrow (in both directions, often clients are very pleasantly surprised how much they can borrow).
There is no exhaustive list of factors that can affect lenders’ affordability calculations, but they often include:
- Any service charge or ground rent expenditure (typically for flats)
- The council tax you pay
- Your age
- The mortgage term being taken
- The number and age of any financial dependents
- Details of any personal loans, including car lease payments
- Details of any credit card expenditure
- Any childcare, nursery or school fee costs
- If you own more than one residential property, the running costs of any other home
- If you own any buy to lets, the details of the rental income and mortgages of these properties
These are just a few examples. In reality, an intermediary will need to go through your most recent bank statements as a full budget planner will need to be carried out for most lenders to determine the amount of borrowing they can offer.
Lenders all have their own affordability calculations which are unique to them, and these often change regularly.
As such, the same client scenario can often see hundreds of thousands of pounds worth of difference in the borrowing offered between two seemingly similar lenders!
As an intermediary we can do these calculations for you across the market, which – with access to over 100 lenders – saves you a lot of time.
Additional income
An important point to note is that lenders all calculate ‘income’ in different ways. This can be seen in particular with additional income, such as bonus, commission and overtime.
Some lenders will only take 25%, or 50%, of this income into account when calculating your maximum borrowing (some consider none at all, currently, due to criteria restrictions brought in during this Covid-19 period).
However, we have access to lenders which can use up to 100% of additional income when calculating your maximum borrowing.
We can speak to the underwriters (the decision makers) at the lenders before an application is submitted, so an intermediary can help you to get a more accurate assessment on your budget and also know which lenders would be happy to use your additional income in their borrowing calculations.
What if you are self-employed?
Another area that can see significant differences across mortgage lenders when looking at how much you can borrow is if you are self-employed.
We covered this topic in a recent article which you can read in full here.
However, to summarise, how you are set up as a self-employed individual will impact how a lender will assess your income.
For example, for a limited company director some lenders will use your salary and dividend income, whilst others will use your share of the company net profits. This can make a significant difference in the amount that you can borrow.
Help to navigate the ever-changing mortgage market
As you will be aware if you are a regular reader of this column, during the pandemic mortgage lenders have been making regular changes to criteria.
This has included affordability and maximum borrowing limits. As such, if you were dealing with a bank directly you may find you are offered one loan amount when you first meet them, and suddenly a new lower loan amount when you find the property of your dreams a few weeks later as their criteria has changed.
By using a mortgage intermediary, you have somebody on your side to analyse the various lender affordability changes. They can pro-actively let you know if you will be impacted throughout your property search to ensure you always know what level you can purchase at.
This also ensures the figures and documentation requirements can be checked with the most appropriate lender when you want to offer on a property, ensuring you are set up for success and that any mortgage application will be able to be processed as quickly and smoothly as possible.
You can see for yourself here some recent examples of how our lender access and relationships has assisted our clients.
Because of this it is now more important than ever to keep up to date with what’s available.
Alexander Hall has access to the largest range of mortgage products. The good news is that mortgage rates do not differ for self-employed applications, so there are some great deals available.
Please get in touch with us if you need any further advice. You can email us at AskAlexanderHall@alexanderhall.co.uk or use the contact us page on our website.
Greg Cunnington is director of lender relationships and new homes at Alexander Hall
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE OR ANY OTHER DEBT SECURED ON IT
