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

Should you overpay your mortgage? If you can put extra cash away you need to seriously consider whether you should pay more off on your mortgage or put it into a savings account.

Buying a property, especially in the current climate, is a big decision for first time buyers. We have listed a few tips that can help you buy your first propertyy

Does the time of year make a difference in house purchases? The answer is, yes and no.

The popularity of buying a house can vary depending on various factors such as regional trends, how the economy looks, and of course personal circumstances. 

If you are looking at putting your house on the market, you may want to consider giving your garden some TLC. Small changes can make your outside space a lot more attractive to potential buyers resulting in a faster sale.

Getting on the property ladder is a big milestone in life, and is not something to take lightly. There are several things to take into consideration such as saving up for a deposit, finding your dream home, and finding the best mortgage product to suit you. Here we look at UK first time buyer statistics.

If you are struggling to get over the hurdle of saving enough deposit due to being in a rental property, but wish to purchase your own home, you may be able to with a 100% mortgage. You will need to meet certain requirements and be financially stable.

If you are looking at remortgaging your property but you are unsure whether it’s the right decision, we have listed five reasons why it might be for you.

As the cost-of-living crisis continues, many people across the UK are struggling financially, many of whom are finding it hard to get debt-free.

According to research by StepChange, there are five common reasons people don’t seek help and advice with debt concerns.