Affordability - Frequently Asked Mortgage Questions

Hi guys

I'm Dan and this is Kye, coming to you from crescent mortgages with one of our FAMQ's - frequently asked mortgage questions.

Today's topic is going to be affordability, so basically how much can you borrow on a residential mortgage, the different ways that lenders assess this and giving you an indication of maybe how much you can borrow, or you can at least work out yourself using the kind of calculations that we give you.

We should mention that we are Cemap qualified mortgage and protection advisors with a combined 20 years in the industry.

Should we jump into it Kye? Let's do this thing.

Affordability. Thinking about it this is the main first topic that we discuss with pretty much everyone, isn't it? Yeah. You know with a residential mortgage, regardless of how limited you are, with the rest of your circumstances and other kind of criteria limitations, it's kind of all irrelevant if you don't meet affordability, if you don't have enough income to borrow the amount that you need, so this is actually a really big one, but hopefully relatively straightforward to explain.

I guess the the first thing to cover is that when lenders look at affordability, what affordability means.

Surely it just means if I can afford it each month, doesn't it?!

Well I mean that is a factor, you do need to make sure that you are going to be comfortable with the mortgage payment, however when you hear someone in the mortgage industry talk about affordability it basically means how much you can borrow.

So when the lender runs their affordability assessment they will come back with a maximum that you can borrow and that's what we're looking at when we say affordability, Right okay.

Now there are two ways, and they'll use both, that lenders will assess your affordability and if the mortgage is going to be affordable. The first one, you can actually jump into that.

Income multiples would be the first one, so I won't explain them yet we'll go into that later - income multiples will be the first one and the second one...

Do you want to just elaborate a little bit?

You want me to elaborate? Ok, so you income multiples is a multiple of your income and it isn't more than that. Your annual gross income before tax.

No that's enough elaboration, we'll come back to that.

And then the second one is when they assess your your month to month affordability so are you going to be able to sustain your mortgage payment along with all of your other bills, commitments, debts, outgoings, food, utilities, all of that kind of stuff, as well as stress testing so you know if interest rates go up, are you still going to be able to afford that.

So they're looking at the income multiples and the monthly affordability assessment and you're going to need to meet both of those assessments for the lender to give you the amount that you want to borrow.

Should we should with income multiples?

So, income multiples, as Dan mentioned earlier, it is just a simple case of your annual income multiplied. Let's keep this one simple to start with, so if you're just looking at your basic income you earn £50 000 a year, before tax, so your gross income.

They will multiply that by generally at least four so £200 000. Some will go up to five so £250 000 and if the income is high enough sometimes you can get to five and a half times income.

You'll get the odd obscure one that can go higher than that, but I wouldn't I wouldn't factor or base everything on that and that's a conversation to have.

Even five and a half is going to be quite difficult for a lot of people, for some people if you meet the criteria then it is possible but a lot of lenders will cap at a maximum of five and again depending on a few other factors you may not even be able to get to five times income.

In terms of what will impact the income multiple, so first of all some lenders will just have higher income multiples than others, so in that area some lenders are more generous than others, so obviously that's why dealing with a broker they'll be able to explore the entire market, rather than if you just go to your own bank where they may not happen to be the most generous lender, when it comes to affordability or income multiples so there's only an absolute limit they're going to be able to lend you, regardless of your circumstances, but I guess the two main other things that impact the maximum income multiple would be...

Your loan to value or your deposit, or equity if you're remortgaging.

Yeah we did cover this in another video which obviously you can check out, our loan to value video, but the better your loan to value, so the lower your loan to value, whether it's a bigger deposit or whether your just remortgaging and you've got a lot of equity, that will sometimes improve your income multiples.

The other one is your income, so a lot of lenders if your income is over £40 000 and that can be a combined household income, if it's over£40,000 or £50,000 or £100,000 depending on the the lender, and they will sometimes go to a higher income multiple because they're they're more comfortable that you're gonna be able to sustain the mortgage to a higher level, so that's income multiples.

If we jump over to the the second one, and again you need to meet both of these, so like I said the monthly affordability assessment. So how are they going to look at that disposable income, they're now looking on a month by month basis.

And again as Dan touched on they're looking at not just your income but they're looking at, what can they actually afford and what you already have going out, so have you already got commitments each month that we need to factor in? Do you have a car on finance? Do you have a bank loan? Do you have credit cards? Children, and therefore possibly child care? Loads of things that come into it.

The mortgage payment itself, exactly. Yes we're aware income multiples just focuses on your income but the monthly affordability assessment will really focus on your income as well as your outgoings, as well as your new mortgage payment which they'll also stress test, based on interest rates going up in the future.

So they need to be comfortable that you can afford your mortgage payment, plus all of your bills and outgoings, not just now but let's say in a few years if interest rates went up by 1, 2, 3, 4 percent, so they're looking at both of those. An example of this is just because a lender could technically lend you five times income and you fit within the criteria to borrow five times your income, if you have significant monthly commitments, let's say you have several debts, that you've got a couple of children, you've got child care costs, then there's actually a fair chance that when they start to factor that in you can no longer borrow the five times income and it will start to reduce again depending on your overall situation.

The same as the income multiples, different lenders have a different way of assessing it so some are a bit more lenient, some are a bit stricter in terms of how much you can have in terms of a monthly outgoing before it starts to reduce the amount that you can borrow, but it's a combination of those two assessments that will decide how much you can borrow in total.

I'd just add in that it's the same on both buying and remortgaging, just because you are remortgaging and you can afford your mortgage currently, they still have to assess affordability if you move to a new lender. If you stay with your existing lender when you switch rates they won't do the same assessment but if you're remortgaging to a new lender they will do the affordability assessment.

I think that's kind of the main info that we wanted to cover today, obviously again, as always, there is more to cover and it really does depend on your your specific circumstances but hopefully that just gives you a bit of an idea.

I suppose one final thing, just a little bit of an example, so providing that you don't have many or any significant outgoings, let's say you don't have too much debt, you don't have loads of child care, then on the whole you probably are going to be able to go up to the limit of income multiples, again depending on the size of the deposit that you've got but I think four and a half times income is quite a good place to start.

Lots of lenders will do that even if you've got let's say a smaller, maybe 10% deposit, providing you don't have significant outcomes a lot of lenders will go to around four and a half times income so you can obviously use that to work out a ballpark of how much you might be able to borrow, but if you are really starting to look for properties and you want specifics then obviously speak to a mortgage professional to actually pinpoint exactly how much you can borrow based on your existing circumstances.

Happy with that, as always, if you could like the video, subscribe to the channel and we will see you next time.

Thanks a lot!