One of the first questions most buyers ask is: “How much can I borrow?”
A lot of people think it’s a simply multiple of your salary. While income multiples can form part of the calculation, mortgage affordability is rarely that straightforward.
A lender wants to understand not only how much money comes into your household, but also how much goes out each month.
How do lenders calculate mortgage affordability?
Every lender has its own affordability calculation. They will usually look at:
- Your basic income
- Any additional or variable income
- Your regular financial commitments
- The number of people financially dependent on you
- The mortgage term and your age
- Your credit history
- The size of your deposit
- Whether you are applying alone or jointly
Lenders must consider whether the mortgage is affordable now and whether you could continue to manage the payments if circumstances or interest rates changed.
What income can be included?
For employed applicants, lenders will normally start with your basic annual salary.
However, other income may also help increase the amount you can borrow.
This could include:
- Regular overtime
- Bonuses
- Commission
- Shift allowances
- Second-job income
- Car allowances
- Maintenance payments
- Certain benefits
- Pension income
- Rental income
Not all lenders treat additional income in the same way. One lender may use all your regular overtime, while another may only use a percentage of it or exclude it altogether.
They may also want to see that the income has been received consistently. This could mean checking several payslips, a P60 or a longer history of bonus and commission payments.
This is why selecting the right lender can make such a difference, particularly if a large part of your earnings is made up of overtime, bonuses or commission.
What if you are self-employed?
Self-employed applicants are generally assessed using their share of net profit, salary and dividends, or salary plus a share of company profit, depending on the business structure and the lender.
Some lenders work from the latest year’s figures, while others average income over two or more years. They may also consider whether profits are increasing, stable or falling.
Having only one year’s accounts does not automatically mean you cannot get a mortgage, but the choice of lenders may be more limited.
How do loans and credit cards affect borrowing?
Existing credit commitments can reduce the amount available for a mortgage. Lenders may consider:
- Personal loans
- Car finance and hire purchase
- Credit card balances
- Store cards
- Buy Now, Pay Later arrangements
- Student loan deductions
- Maintenance or child-support payments
- Other mortgages or secured borrowing
Even if you clear your credit card in full each month, the lender may still take the current balance or regular use into account.
A loan with only a few months remaining may be treated differently by different lenders.
Some may disregard it, while others will continue to include the monthly payment in their calculation. The lender may also ask how any debts will be repaid if you have said they will be cleared before completion.
Do children and other dependants affect affordability?
Yes. Lenders usually ask how many children or other people are financially dependent on you.
Having dependants does not prevent you from getting a mortgage, but lenders recognise that a larger household will generally have higher living costs. Childcare or nursery fees can have a particularly significant effect on borrowing.
Some lenders use estimated household expenditure based on family size, while others ask for more detailed information about your actual monthly spending.
What other outgoings are considered?
Alongside credit commitments, lenders may look at regular costs such as:
- Childcare
- School fees
- Travel and commuting
- Pension contributions
- Insurance
- Ground rent and service charges
- Council tax and household bills
- Maintenance payments
- Existing property costs
Everyday spending does not necessarily need to be perfect, but lenders want to see that the proposed mortgage payment is realistic and sustainable.
Why can different lenders offer different amounts?
Lenders use different affordability models and have different attitudes towards income and expenditure.
For example, one lender may:
- Accept 100% of regular overtime
- Ignore a loan that is nearly repaid
- Take a more generous view of bonus income
- Offer a higher income multiple for certain applicants
Another lender may take a more cautious approach to exactly the same circumstances.
The mortgage rate, term, deposit and loan-to-value can also affect the calculation. A longer mortgage term may reduce the monthly payment and increase affordability, although it could mean paying more interest overall.
Some lenders may also use higher affordability calculations where a longer term fixed rate is taken.
Should you use an online mortgage calculator?
Online calculators can provide a useful starting point, but they are only estimates. They often cannot fully account for variable income, childcare, credit commitments or the differences between individual lenders.
At Oak Mortgages, we look at your complete circumstances rather than applying one simple income multiple. By understanding how different lenders assess affordability, we can give you a more realistic idea of what you may be able to borrow and which lenders may be best suited to you.
Thinking about buying or remortgaging? Speak to the Oak Mortgages team for an initial assessment of your borrowing options.
Your home may be repossessed if you do not keep up repayments on your mortgage. The amount you can borrow will depend on your individual circumstances and the lender’s affordability assessment. Any figures provided before a full application are estimates and are not guaranteed.
