For many years a multiple of earnings has been considered a way to gauge how much a mortgage lender will lend.
For example, if a mortgage lender suggests they would lend 5x income, someone with a £10,000 salary would be able to borrow £50,000.
In some instances this is still partly the case but to safeguard against overstretching individuals with high outgoings, most lenders will also now look very closely at the whole affordability picture.
For example, Woolwich still use a 5x salary multiple as a guide but they also insist a borrower has a minimum amount of disposable income after paying for essentials like; the mortgage, council tax, school fees and maintenance.
Abbey use the borrowers ‘net’ monthly income to calculate how much they will lend but also have an upper ceiling of 5x income.
Most lenders now have an ‘affordability calculator’ on their website which can be used to determine if the mortgage required is likely to be accepted by the respective lender and although these calculators are only referred to as ‘guides’ they are a very close approximation of the actual figure (provided all important information is input).
By assessing borrowers in this way lenders can take less risks because they have a much better idea of the borrowers financial situation.
Lenders will also take off any financial commitments from a borrowers gross salary before calculating how much they will lend.
eg: A borrower has a gross annual income of £20,ooo and a loan which costs £50 per month and maintenance payments of £100 per month.
This represents a monthly fixed liability of £150.
The borrower will need (£150 x 12) £1800 per year to make sure these commitments are paid and so the mortgage lender doesn’t jeopardise the borrowers ability to make these payments, they will not take into account £1800 of the clients income.
If the borrower approached Woolwich without any loans or maintenance then they may be able to borrow £20,000 x 5 = £100,000 (subject to affordability).
With the liabilities (£20,000 – £1800 = £18,200) x 5 = £91,000 (subject to affordability).