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.

Related articles: 

Download our Free First Time Buyers Guide

Recent posts

Selling up? It’s important to make your house as appealing as possible to potential buyers. Good decorating can help with first impressions, and increase the perceived value of your property.

With the cost of living affecting so many of us, we have made a list of budget-friendly activities and ideas for you.

Moving soon? It's never too early to get organised! Be prepared and avoid unwanted stress by checking out our list of tips to get you ready for moving day.

Inflation simply put, is the increase in the price of something over time. The Office for National Statistics (ONS) tracks the prices of hundreds of everyday items and these items are updated to reflect shopping trends.

We are often asked if it's good advice to consolidate “unsecured” debt (credit cards and loans etc) into your mortgage, the answer is, sometimes

When you’re looking to buy a home, and you own a car, you ideally want to know the rules on parking in the area. Parking rules can be confusing, even for the most experienced of drivers! This is why we have written this blog to help you.

There are several potential sources you can consider when it comes to getting together a deposit to buy a property. Providing proof of the source of your deposit is a key requirement in the application process and will need to be given to both the lender and the solicitor.