How much can I borrow?

When you apply for a mortgage or remortgage, many lenders will calculate the size of loan they offer you by multiplying your income by a set amount.

If you're applying for a mortgage on your own, for instance, they will usually lend around 3 to 3.5 times your gross annual income - hence the 'multiple' bit.

If, on the other hand, you're applying for a mortgage with someone else, they'll typically lend either 2.5 times your joint income, or 3 times the larger income plus 1 times the second income.

So, by way of example, if you earn £50,000 a year and your partner takes home £30,000 annually, and you're applying for a mortgage on a joint basis, many lenders will offer you in the region of either £200,000 (2.5 times £80,000) or £180,000 (3 times £50,000 + £30,000).

However, many lenders may deduct any commitments that you have from your gross basic salary before applying their income multipples, such as; loan payments and credit and store card payments to name but a few.

Basic earnings
Higher and higher
What sort of job?
Thing of the past
Overtime and bonuses
Additional income

Basic earnings

It's worth pointing out that gross annual income is generally deemed to be your basic salary plus any guaranteed bonuses.

For many people, this is perfectly acceptable as they earn a basic salary only and have no bonuses or commission to take into account.

However some people earn a low basic salary but actually earn double or triple that amount via commission that is not guaranteed (let's say you're an estate agent, recruitment consultant, or work in advertising sales).

Income multiples clearly work against them, as lenders will often only look at the guaranteed chunk of their income.

Higher and higher

In recent years there has been a clear trend towards higher multiples, in some cases as much as 7.5 times annual salary (although 4 to 5 times salary is more common).

This is mainly because interest rates, since the late nineties, have been consistently low and much less volatile.

In short, lenders feel the threat of borrowers being overstretched by sudden interest rate rises is significantly lower these days.

So they are happy to lend more than they would have done 10-15 years ago when interest rates were higher and the climate less stable.

Of course, low interest rates also mean mortgages are cheaper to repay, meaning there is less chance of borrowers defaulting, even on bigger loans.

The availability of longer fixed rate periods, from five to sometimes 25 years, is another reason why lenders are currently offering larger multiples, as there can be no ugly surprises for borrowers in the form of sharp increases in their repayments.

What sort of job?

In some cases, the type of employment you are in can also result in a bigger loan offer.

For example, if the lender feels the borrower has strong future earnings potential or will not struggle with the repayments because they are in very secure employment, they will tend to be more 'generous' with their multiples.

Doctors, accountants and solicitors fall into this category.

Lenders may also offer a higher multiple if the borrower puts down a bigger deposit, as they are seen as less of a risk.

However, consumer bodies stress that borrowers should always be extremely cautious when considering higher multiples because the repayments, relative to net monthly income, can be sizeable.

And if interest rates rise, the repayments will too if you've opted for a variable rate mortgage.

Thing of the past

Over the past few years, some of the big lenders have started to turn their backs on income multiples, which they see as crude and simplistic.

Instead, they are using a new criterion called 'affordability'.

This is considered to be a far more sophisticated and responsible approach to mortgage lending.

Many people in the industry believe that income multiples will soon be a "thing of the past".

Rather than apply a multiple to the applicant's gross annual salary, it sets out to determine the disposable income the applicant will have after all the other essential monthly spends and outgoings.

For example, as well as loan commitments, the lender will look at other areas of essential spending such as:

travel and transport costs
food budgets
council tax
insurance premiums
monthly credit card bills
whether you have children living with you (with all the associated costs!)
the different types of household bill you are liable to pay

With this knowledge, the lender gets a far clearer picture of what applicants can realistically afford to spend on repayments each month.

Overtime and bonuses

More positively, lenders may also take into account any regular overtime and commissions, even if not 'guaranteed' .

What if someone has a gross annual salary of £30,000, but has, say, £5,000 in credit card debts, spends £250 a month on loan repayments and £100 a month on travel costs?

That person would be offered a smaller mortgage than an applicant with the same salary but no debts and travel costs.

In this sense, it's clear that people without debt will benefit most from the affordability-based approach, particularly if they are single with no dependants.

In many cases, they will be able to secure a mortgage far bigger than they would have using the income multiples system, allowing them to buy homes previously beyond their price range.

Additional Income

Some lenders will take in to account additional forms of income.

For example working and child tax credit, Maintenance payments, regular overtime, bonus and commission and income from a second job. Some lenders may use 100% of the income or only a portion, e.g 50%.

It is important to remember that everyones circumstances are different and what is right for you may not be right for your friend / colleague/ family member for example.

We assess every case on an individual basis to ensure we meet the needs of our clients in an affordable and compliant manner.

For further information and an unbiased informative chat, please telephone Rugby Mortgage Solutions on 01788 576654.