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Mortgage Affordability

Mortgage Affordability Rule of Thumb

  • 3 to 3.5 times income – meets affordability nearly all lenders
  • 4 to 4.5 times income – is maximum affordability with most lenders
  • 4.6 to 5.0 times income – meets affordability in some cases with specific lenders
  • +5.0 times income – can occasionally be achieved for higher earners

As you might expect, enquirers often ask us to give them an affordability limit over the telephone. As you can see from the content below this is not a practical thing to do as each case must be investigated. Please note that where there are considerable current debts, car loans, student loans, pension contributions, large families, or short mortgage terms, the above rule of thumb is of little value

Mortgage Affordability – example first time buyers

  • First time buyers
  • 10% deposit
  • No dependents
  • Some debt including student loans
  • Incomes £31,000 and £28,000

Mortgage Affordability Highest

  • Nationwide £280,300
  • Halifax £280,250

Mortgage Affordability Generous

  • Coventry £265,500
  • Kensington £265,500
  • Leeds Building Society £265,000
  • Barclays £264,910
  • Accord £264,910
  • Virgin Money £264,910
  • Platform £264,910
  • Tipton and Coseley £264,900

Mortgage Affordability Good

  • Santander £262,550
  • Skipton – £261,500
  • NatWest £250,700

Mortgage Affordability – example home movers

  • Family home movers
  • 30% deposit
  • 2 children
  • Car loan and nursery fees
  • Above average incomes £61,000 & £45,000

Mortgage Affordability Highest

  • Accord £475,590

Mortgage Affordability Generous

  • Halifax £456,860
  • Coventry £454,500
  • Virgin Money £454,500
  • Platform £453,490
  • Tipton and Coseley £453,400
  • Leeds £451,659

Mortgage Affordability Good

  • Natwest £442,700
  • Santander £440,024
  • Nationwide £431,200

Lenders Affordability Calculators

Please note that many of these online mortgage affordability calculators are not as simple to complete as they first appear. Your mortgage Broker will be familiar with the the complications and can give you an accurate assessment of your maximum mortgage lending

How do mortgage lenders calculate affordability

As you would expect, mortgage lenders are interested in both your income and outgoings to calculate your mortgage affordability.

Mortgage Affordability and Income

Lenders are typically interested on pre-tax earned income. Some will also consider, pension or investment income, income from properties, or benefits income and tax credits.

Outgoings and Mortgage Affordability

When considering outgoings Lenders are primarily concerned with existing debt (credit cards and loans).

They are also interested in the number of dependents you have and specific costs such as child care and school fees.

Mortgage Affordability and Mortgage Term

Mortgage Term can greatly affect mortgage affordability, clipping it heavily for terms under 25 years. With some lenders stretch a mortgage term to 30 years of beyond can sometimes be beneficial for mortgage affordability calculations.

Other factors when assessing mortgage affordability

Loan to value and credit history can cause a Lender to adjust maximum affordability calculations.

Mortgage Lenders also run ‘stress tests’ on your affordability meaning, although you can afford the mortgage today, will you still be able to do so if mortgage rates rise? Sometime the selection of a 5 year fixed rate can assist affordability as it will eliminate the effect of stress testing.

Mortgage affordability and regulation

Since mortgages are regulated products, the Financial Conduct Authority needs to be comfortable with how each mortgage lender assesses mortgage affordability.

Therefore, each mortgage lender has made a submission to the Regulator outlining how they will assess mortgage affordability. For this reason a mortgage lender is not is a position to make individual adjustments or allowances on a particular case.

Self employed mortgage affordability

Mortgage affordability for the self employed applicant is working out in a similar way to the employed applicant.

The key difference is how income is assessed for the self employed.

Sole Traders

Income is based on the self employed income stated on your annual tax calculations. (In other words turnover less business costs).

Partnerships

As with Sole Traders income is based on the self employed income stated on your annual tax calculations. (In other words your share off turnover less business costs).

Limited Company Directors

How Limited Company Directors are assessed for mortgage affordability depends very much on your share holding.

Typically a Company Director holding less than 25% of the business will be treated as if employed.

A Company Director with 25% of more of the business shares will be treated as self employed and income will be based and PAYE and Dividends.

Some Lenders can based income for Limited Company Directors on PAYE and Share of Net Profit.

Revenue and income for the self employed will vary from year to year and how your mortgage lender handling this effect can greatly influence your maximum affordability.

Most will average two or three years figures, some with work on your latest figures.

Contractor Mortgage Affordability

If you are a Contractor paid on a day rate there are Lenders that will consider your day rate to calculate your income rather than your Accounts. A typical Lender’s calculation for a Contractor would be

Day rate X 5 X 46 weeks = income

Help to Buy Mortgage Affordability

Mortgage affordability on Help to Buy mortgage cases is working out in two elements.

Main mortgage

The affordability for the main mortgage lending is worked out by the Lender with allowance made for the cost of the Help to Buy Equity Loan.

Equity Loan Affordability

There is also an affordability calculation for the Help to Buy Equity Loan. The applicant needs to meet limits on this calculation as well as the main mortgage.

Separate affordability calculators are available for Help to Buy and London Help to Buy.

Under both schemes you cannot borrow more than 4.5 times the household income on your main mortgage.

Buy to Let Mortgage Affordability

Buy to Let Mortgage Lenders will generally assess mortgage affordability based on rental income.

The Lender will want the rental income to exceed the mortgage payment by some margin. The margin required tends to vary depending on your tax status. Higher rates tax payers need to meet a more aggressive calculation.

Margins and calculations vary and some Lenders are more generous than others. A typical calculation would expect the annual rent to calculate to least 145% the mortgage interest based on 5.5% rate.

This makes £1,000 per month of rent sufficient to support £159,000 of lending.

Buy to Let top slicing

When the rental income does not meet the calculation for the lending required, some Lender will factor other income received by the applicants – this is known as top slicing.

Buy to Let Portfolio Landlord

An applicant who will finish the mortgage transaction with 4 or more mortgage buy to let properties is considered a portfolio landlord.

The regulator sets out additional affordability calculation requirements for a portfolio landlord and this can become very complex. Rent may be assessed against mortgage costs across individual properties as well as the portfolio. There will typically also be loan to value limits that must be met.

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