Mortgage affordability represents how much a bank would be willing to lend to you. This is a calculation based on income and expenditure and the calculation is different with every mortgage lender. Credit commitments are the biggest expenditure factor influencing mortgage affordability and represent the focus of this week’s blog.
The majority of lenders issue loan to income (LTI) multiples which represent the maximum they will lend based on annual income. For example, an individual earning £50,000 would be able to borrow up to £250,000 based on a LTI multiple of 5x income. Currently, income multiples can vary from 4x all the way up to 6.5x income on a residential mortgage. Since October 2014, the Financial Conduct Authority (FCA), the UK financial services regulator, have limited the number of mortgages which can be offered above 4.5x LTI to no more than 15%. However, recent talk has been this restriction may be lifted or adjusted to ease mortgage affordability.
If your level of income provides the ceiling for the amount you can borrow, credit commitments are what can begin to reduce this. Credit commitments include anything that appears on a credit file and this is analysed by the prospective mortgage lender as part of the application process. The most common credit commitments include personal loans, credit cards and car finances. While it is normal for people to have credit commitments, it is important to understand that outstanding credit commitments may reduce the amount you can borrow. Credit cards can be ignored in the affordability calculation, providing they are cleared monthly. Financing of phones, car insurance or household items on 0% finance will typically show on a credit file. These are simply small personal loans, and the monthly payments will be taken into account for affordability. On the other hand, buy now pay later does not currently show on a credit file. However, following the Woolard Review published in February 2021, and more recent consultations, increased regulation around buy now pay later is coming. While personal loans, credit cards, car finances and other credit commitments can be necessary… If you’re wanting to maximise your mortgage affordability, minimising your credit commitments is a good place to start!
How lenders treat credit commitments can vary massively. Some lenders allow a large amount of monthly expenses or outstanding credit before they begin to reduce the mortgage available. In contrast, some lenders will begin to reduce the maximum borrowing for a small monthly expense. Getting the right advice ensures you can understand the mortgage options available to you.
Other factors that can have a significant influence on mortgage affordability include the mortgage term and household expenditure. Generally, a longer mortgage term will allow increased mortgage borrowing. Regarding household expenditure, most lenders use average figures provided by ONS data and have this built into their affordability calculation. Some lenders however analyse bank statements and look at individual expenditure to determine affordability. This includes money spent on food, utilities, travel, insurance, subscriptions, childcare/nursery costs and many more monthly expenses.
Whether you’re considering new interest free loans or a new car finance, or you’re looking to pay off your credit card or clear a personal loan… If you want to understand how your level of current/future credit commitments would affect your mortgage affordability, we’re here to help with free professional advice. Different lenders can allow vastly different borrowing amounts so it’s worth having a chat to understand what’s possible when buying or remortgaging.