Mortgage lenders use a two step calculations based on your circumstances, each lender will have their own variation of these calculations but they all follow the same basic format.
Step 1 – Income multiple
The first thing that a lender will do when assessing what you are able to borrow is multiply what income of yours that they are able to use to support a mortgage by a particular amount, the multiple that each lender uses is generally between 4 and 5 times. The figure that they will use will vary based on your circumstances and will differ from lender to lender. Lenders generally look at your income level and the amount of deposit that you have, the higher your income and deposit, generally the higher income multiple that they can use.
Step 2 – Affordability
The second part to the calculation involves the lender making sure that you can afford the payments if interest rates increased, they will take the amount that you can borrow in step one and apply a rate of generally around 3% above the lenders standard variable rate. For example based on the time of writing, Halifax’s standard variable rate is 8.74% so they would look to ensure that you could afford the payments if the interest rate was 11.74%.
It is within this step that your finances are reviewed, the lender will look at any financial commitments you may have and include them within this part of the calculation to make sure you can still afford the mortgage. A lender will look to include anything that you cannot stop in order to meet your mortgage payments, examples of the type of things that they will include are:
- Financial agreement – Loans, credit cards, other mortgages, car finance/leases, overdrafts etc
- Student loans
- Number of people that are financially dependant on you
- Childcare or university costs
- Property related costs such as ground rent and service charges
The impact of these commitments along with the higher stressed mortgage payments, could reduce what you can borrow from the first step of the calculations. The more outgoing that need to in included within the calculations, the greater the impact that there will be on what could be borrowed.
Below is an example of the impacts of having additional commitments to maintain alongside your mortgage, this is based on a couple with no dependants and a mortgage over 35 years:
Step 1:
| Deposit amount | £30,000 |
| Household income | £75,000 |
| Income multiple | 4.49 |
| Borrowing amount | £336,750 |
Step 2:
| Car finance |
None |
£285 per month |
| Credit card balance |
None |
£3,500 |
| Student loan |
£150 per month |
£200 per month |
| Amount that could be borrowed |
£336,750 |
£287,790 |
These calculations are based on one lenders affordability calculations at the time of writing, they do change in line with market conditions so could vary.