When assessing borrowing levels using affordability, the lender will first look at your entire range of existing financial commitments. Thats everything from personal loan and store card repayments through to running a car and paying your council tax. Alongside your proposed mortgage repayment, this total expenditure must not exceed a certain proportion usually 40 per cent of your net monthly income. In addition to this, your credit score will be considered as well as your life situation, such as whether you have dependants.
Affordability is a more sophisticated way of calculating what you can actually afford to borrow in terms of monthly repayments and is something lenders have been able to do as a result of improved technology, says Hollingworth. In most cases it means that applicants can borrow more than they would using income multiples but only if their financial situation allows it.
Following encouragement from the Financial Services Authority (FSA), a considerable number of lenders have now moved over to affordability, including Halifax, Alliance & Leicester, Intelligent Finance (IF), the Royal Bank of Scotland and Cheltenham & Gloucester. Nationwide still uses income multiples and has recently increased them to 4.2 times income for both single and joint salaries. However, this is because they now form only part of a wider affordability calculation in which all of the borrowers finances are assessed. An assumed interest rate is also used to calculate affordability, mitigating the effects of any potential rate rises.
In short, what you can borrow will come down to the individual. We have done deals with IF and Standard Life Bank where we have negotiated between five and six times salary for our clients, says Nick Gardner, director at mortgage broker Chase de Vere Mortgage Management. This is done very much on a case-by-case basis, and the applicant usually needs to have virtually no other credit commitments at all.
When going to a lender that uses affordability criteria, it becomes especially beneficial to clear your debt first. Paying off £2,000 could mean borrowing another £8,000 on your mortgage, according to Ray Boulger, senior technical director at broker John Charcol which can constitute a very welcome trade.
Using your parents income
But these days, there is nothing to stop you recruiting other salaries to help you afford your first home. A number of lenders offer schemes that allow your parents to boost your borrowing capacity and they wont have to part with a penny.
The Bank of Irelands 1st Start scheme [see box above] offers first-timers an income multiple of four times salary, or, perhaps more usefully, will lend four times the parents income after their existing mortgage repayments have been deducted, explains Gardner. Alternatively, the bank will lend 2.75 times both the parents and childs income.
The mortgage will be written in both names but as its only secured on the childs property the parents home is not at risk. In addition the property deeds only need to feature the childs name so the parent will not incur capital gains tax liabilities when the property is sold. The deal is available up to 100 per cent LTV. On this basis, the cheapest version is a two-year discount mortgage with a current pay rate of 5.64 per cent.
Alternatively, most lenders will allow parents to act as a guarantor for their child on any shortfall in income multiples. So, if the child qualifies for a £100,000 loan but needs £160,000, the parent will guarantee £60,000. Look out for tax exposure here, says Gardner. The Bank of Ireland does not require parents to be named on the property deeds. The Woolwich does but allows you to split ownership 99 per cent to 1 per cent, minimising your tax liability.
Next: Borrowing more than 100 per cent
