How much can I borrow?

It's always worth satisfying yourself that you can afford the monthly payments before you enter into any financial commitment. Don't be tempted to overstate your income to get a larger loan which you may not be able to afford. If you falsify your income you will be committing a fraud and could end up with a criminal record.

It's in the lenders best interest to lend responsibly which means they need to take many factors into consideration when assessing your application for a mortgage. The amount you can borrow will depend on your circumstances. Your income, employment status, credit history, outgoings and the amount you put down as a deposit will be considered by a potential lender.

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We would be delighted to hear from you if you would like us to help you calculate an affordable mortgage. Call us free on 8088 298 5136. Alternatively, use the call me feature and we will contact you at a convenient time. If it's just a quick quote you're after, we will be pleased to help.

Calculating your borrowing limit

At the moment, most lenders will consider a multiple of your gross (before tax deductions) annual income. If you are borrowing on a single income, some lenders will consider a loan amount up to four times your annual gross income. If you are borrowing as a couple together, some lenders will consider a loan amount up to three times your gross annual joint income. If a proportion of your income is made up of bonuses or commission payments and these have been consistent for a period of time, lenders may consider using the full amount in their calculation. Overtime payments and other income of an inconsistent nature may be restricted to half of the amount.

If you have existing credit commitments (loan payments, credit card payments, hp etc), most lenders would want to make a provision for this in their calculation. After all, you will need to be able to service your existing commitments as well as afford the new mortgage. Two individuals may have very similar incomes but their outgoings can be very different. Any existing loan payments that have more than six months to run, may be annualised and deducted from the gross annual income before the lenders apply the multiple.

Traditional income multiple calculation example:

Principle applicant - gross annual income £28,000

Principle applicant - gross annual overtime/allowances £10,000

Second applicant - gross annual income £16,000

Principle applicant - annual personal loan repayments £1,452

To calculate the principle applicants allowable income for mortgage purposes, add half of the overtime and take away the loan amount as follows:

£28,000 plus £5,000 (overtime may be regarded as consistent but is not guaranteed) less £1,452 (existing loan commitment) = £31,548

Apply the lenders multiple as follows:
£31,548 x 3.5 (typical lenders multiple) = £110,418.

Add the second applicants gross annual income to £110,418 to calculate the maximum mortgage advance:

£110,418 + £16,000 = £126,418

Affordability Calculations

More importantly, the mortgage payments need to be affordable now and at a later date which is why, more recently, some of lenders have moved away from traditional income multiples preferring to adopt an affordability calculation instead. Each lender will have its own method, but generally they will all try to calculate your disposable income. Some affordability calculators take into consideration your tax status, the mortgage term required (normally up to 25 years), number of dependents, household expenses and other credit commitments. In some circumstances this method allows the customer to borrow more than he would have done using the multiples.