How much can I borrow? It’s one of the first questions I’m usually asked by clients thinking about buying a property, or renewing their mortgage.
The answer is not always straight forward, in fact it can be a complex calculation with a different answer from different lenders. Finding the right lender for your circumstances is key if you want to maximise your borrowing potential.
Regulatory changes mean lenders must consider affordability, which means looking at income and expenditure. It’s useful to understand how this is treated:
Annual basic income - employed or self-employed.
- Self-employed applicants generally need two or more years of accounts for an application with a high-street lender. There are specialist lenders who accept one year of trading figures.
Payments from overtime, bonus income and certain benefits and allowances can also be used in income calculations. These can be treated in different ways as follows.
- Annual bonus. 50% of the annual amount received is usual, although some lenders will look at a higher percentage.
The following income must generally be received in the three consecutive months prior to application to be considered in the income calculation:
- Monthly bonus and commission. Lenders look at the average over the preceding three months then use between 50% to 100% in their calculations.
- Overtime. Again the average of the last three months is taken then between 50% to 100% is used.
- Allowances (car, travel, accommodation, training etc.) Some lenders will use 100% of this income but others ignore it.
- Benefits such as tax credits and Disability Living allowance: certain lenders will allow these to be used to enhance the income but not all.
Your spending patterns, credit and any dependants all affect your borrowing potential.
All credit agreements will be taken in to account by the lenders. These include loans, car finance, overdrafts, credit cards and hire purchase including any interest free agreements.
These amounts will be deducted from your annual income figure:
- Monthly payments for loans and car finance are multiplied by 12
- 3% of your total credit card borrowings multiplied by 12
- 3% of any overdrafts multiplied by 12
Pension contributions and other deductions from your income can also reduce your borrowing potential.
Other expenditure and considerations
If you have children, this will be factored into the lenders’ calculation and will reduce the amount that can be borrowed. Besides child care costs (which not everyone has) there are additional expenses involved with providing for children.
Lifestyle and personal spending will be assessed at application and any obvious monthly commitments will be assessed e.g. habits such as online gambling.
Generally, lenders will ignore gym memberships and mobile phone contracts and will use national statistics for utility bills and other living costs.
So how much can you borrow?
Typically, the figure is 4 to 4.5 times your income with some lenders even stretching to 5 times, with the same multiples for a joint application.
The most important point is that all the above facts will need to be taken in to account before this income multiple calculation is run.
Knowing how different lenders treat income and expenditure is the added value that a good mortgage broker can bring. This knowledge can increase the chance of a successful application at the right level of borrowing.
If you are considering your options, get in touch. After a short assessment, we can establish your borrowing potential and help you through the next steps.