How Much Can I Borrow For A Mortgage?
The two most common questions we are asked daily are, “Can I get a mortgage in my situation?” and “How much can I borrow?”. In this article, we explore the latter.
How Much Can I Borrow?
Back in the 1980s and 1990s, most mortgage applications were manually underwritten with little technological intervention in the process. You’d make an appointment with your local Building Society Manager, and he or she would interview you.
They would probably encourage you to bank and save with them until you prove yourself credit worthy. The manager would then grant you the equivalent of an Agreement in Principle. They would then follow this up with advice on how much they were prepared to lend.
This could be seen as a highly personalised process with a common-sense approach. However, it could lead to inconsistent decision-making as the manager has the discretion to interpret the lending manual. In other words, you could possibly have approached the same Building Society in a different town or city and obtained a different outcome.
With a view to eradicating the above and more importantly, cut costs, Lenders moved to automated affordability calculations. “Caps” were applied so they wouldn’t lend you more than, say, 3 or 4 times your household income.
As the 2000s progressed, Lenders were becoming more and more generous in how much they would lend. Some Lenders would even offer self-certified mortgages, where no background checks would be carried out.
As we all remember, in 2008 the market crashed and, as a result, the following couple of years were difficult if you were trying to get on the property ladder. The Lenders battened down the hatches and created a very cautious (over-corrected) lending environment.
In 2014, following the recovery of the market, the regulator launched the Mortgage Market Review (MMR). This was a new set of guidelines for Lenders to adhere to. Gone were the old-style income multipliers which took little account of household expenditure.
Before 2014, two applicants with the same income could borrow roughly the same as each other. This was irrespective of how much they spent each month. Then came new affordability models which took a much more forensic view of how applicants managed their money on a monthly basis.
There is still a “cap” in place with most Lenders not going past 4.75 times your annual income. However, they also analyse your spending habits. For example, if you have high childcare costs, lots of credit commitments and a student loan, they will offer you less than your work-colleague who doesn’t have any of that expenditure.
We are constantly surprised by the large variations from lender to lender. Some Lenders seem to penalise low earners (perhaps they are not looking for that type of applicant). Others see pension contributions as a fixed outgoing so would often lend less to a public sector worker for example as they have a big pension deduction.
It really is horses for courses and if you need to maximise your borrowing capability to obtain the home you need to buy then you’ll definitely need a local Mortgage Broker on your side who can research the market on your behalf to see if anyone will lend you the amount you need.
If you’re wondering “How Much Can I borrow?” and looking to take out a mortgage, you should sit down with an Advisor and work out your finances together to ensure that the repayments feel comfortable to you.
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