Since the introduction of mortgage affordability tests (stress tests) post 2008, it has been a legal requirement that all lenders undertake checks to ensure that a borrower’s ability to meet their monthly repayments is not overly affected by changes in their circumstances or an increase in interest rates over the period of the loan.
To do this the mortgage lender will ask detailed questions about the lender’s income, employment status, age, personal circumstances, other debts and liabilities and lifestyle. The answers provided by the lender will need to be supported by evidence too, such as payslips, P60s, bank statements, etc.
The maximum amount you are likely to be able to borrow and the cost of borrowing (the interest rate and other associated charges) is linked to a combination of;
- The Loan to Value ratio of the property you intend to buy
- The Mortgage Multiplier based on the applicant’s income
- The monthly income and outgoings of the applicant
- Any outstanding debts owed by the applicant
- The deposit sum you have available for the purchase
- The current rate of interest and the notional rate set
Nowadays, the maximum Loan to Value ratio is usually 95% of a property’s value. Interest rates will be higher for borrowers putting down such a small deposit and there will be additional charges including mortgage redemption insurance which the lender will require the borrower takes to protect the lender from a costly default.
Mortgage multipliers will vary dependent on an applicant’s personal circumstances and whether it is a joint mortgage application, but in general terms 3 times to 4.5 times an applicant’s gross income is a good rule of thumb.
Mortgage affordability is based around your monthly net income and outgoings, the current rate of interest being charged by the lender and a notional rate of interest which is supposed to reflect what might happen if mortgage rates increased over a fixed period.
The higher an applicant’s ‘discretionary spend’ (i.e. the amount left after your monthly expenses have been deducted from your take home pay) the better your affordability score. This is why revisiting your monthly budget and reducing fixed outgoings such as unused gym membership, magazine and netflix subscriptions and similar expenditure is well worth doing before you make your application.
In simple terms, the larger your deposit, the larger your income and the smaller your debts and monthly expenses, the more attractive you will be to lenders. It could be argued that the more in need of the loan you are, the less likely you are to get it, but the counter argument made is that if a loan is not affordable then it is irresponsible for the bank to make it.
For more information contact us or speak to a mortgage adviser on 01628 507477.
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