How mortgage lenders assess affordability.
Mortgage lenders will assess affordability using two things, your income and you’re out goings. What makes it complicated is that not all lenders do things the same. The rules they abide by are open to some interpretation. If lenders did not asses expenditure as well as income then a rudimentary income multiple could be used.
Although rudimentary income multiples still have there place somewhat, as a very rough guide. They cannot be relied upon as it does not account for outgoings, most maximum lending is capped somewhere in the range of 4.5x, 4.75x and 5x a borrower’s income. Although 5x is rare and only available to those that fit other criteria, for example earn over £75k per year or have a loan to value under 50%.
When it comes to income most lender use your gross pre tax income. This might include income from a salary, overtime, commission, certain allowances, government benefits and self-employed income.
See post here about how lender asses self-employed income.
Mortgage lenders will also look at an applicant’s expenditure. These can be categorised into 3 types:
- Committed Expenditure – Loans, credit cards, child maintenance payments, child care, etc.
- Basic Living Costs – Council tax, utilities, commuting to work, etc.
- Quality of life costs – Clothes, entertainment, etc.
The most important is committed expenditure as these are fixed costs that cannot be reduced. These also vary a lot person to person so are always specifically asked for by mortgage lenders and then used in their calculations. The other two categories can be somewhat variable and in a lot of cases mortgage lenders will use office of national statistics (ONS) data