How much can I borrow? Affordability criteria explained
Posted 4 December 2015 by Keith Osborne
Up until the global financial crisis, getting a mortgage was mostly based on your income. Lenders typically lent up to five times your gross income - or four times joint income - meaning it was easy to work out your borrowing potential.
Since the Mortgage Market Review of 2014, lenders have to take much more care when underwriting your mortgage. This means that they now look much more carefully at both your income and your outgoings and they will base your mortgage on whether you can afford it, not simply on a multiple of your income.
Borrowing based on affordability, not income multiples
Since 2014, lenders have mainly based mortgage lending on affordability. While lenders now cap the amount they will lend you at 4.5 times your income they will also look at your regular expenditure to determine the size of loan they will agree.
If you're looking for a mortgage a lender will scour your bank statements to work out whether they think a mortgage is affordable to you. Lenders generally split your spending into three criteria:
- Committed expenditure - these are fixed payments such as utility bills, council tax and rent
- Non-committed expenditure - these are ad-hoc payments such as eating out, gambling and weekends away
- Other payments - these are payments you may think are essentials, such as clothes or credit card payments
A lender wants to know that you will have enough money after your expenditure to afford the mortgage. They will also look at factors such as the costs of childcare, regular direct debits and your holiday/eating out habits.
In addition, not only will a lender look at whether you can afford your mortgage now but they also have to determine that you will be able to afford it in the future. They will 'stress test' your ability to repay the mortgage taking into account factors such as:
- whether you plan to have a family
- whether you intend to change your job, take a career break or go self-employed
- potential interest rate rises
- when you intend to retire
How much can I borrow?
The exact amount you can borrow will vary from lender to lender as each lender applies its own affordability rules.
In general lenders will look at:
- Your income - this may include your basic pay/net profits, overtime and commission, investment income and fixed payments such as maintenance or financial support from an ex-spouse
- Your outgoings - this will include regular payments such as utilities and Council Tax, loan/credit card repayments, insurance and estimates for general items such as clothing, holidays and childcare
- Future changes - you'll have to prove you can afford the mortgage if interest rates rose, you took time off to have a family or you want to take a career break
Many lenders have online mortgage affordability calculators that will give you a general idea of the amount you can borrow.
Some smaller lenders take a more individual approach to underwriting and may take your specific circumstances into account when deciding what they can lend. Larger banks often use a calculator or more general criteria to determine how much you can borrow.