Mortgage affordability is a common topic across our weekly blogs as it’s central to nearly all residential mortgages. Affordability is predominantly dependent on income and expenditure, and it can vary significantly between different lenders. Income multiples are a big factor in mortgage affordability variation. We’ll take an in-depth look at income multiples in this week’s blog.
Income multiples, often referred to as loan to income (LTI), are expressed as a multiplier and are used by the majority of lenders to determine the ceiling at which they will lend. The income multiple times by the household income give the maximum mortgage available. For example, using an income multiple of 4.5 on a household income of £50k, the mortgage available would be £225k.
Income multiples vary between lenders and each lender can use a range of income multiples depending on a number of factors. Level of household income and the loan-to-value (LTV) of the mortgage are the two biggest factors affecting the income multiple used. With most lenders, the higher the household income and the lower the LTV, the higher the income multiple available. A higher income multiple can significantly increase the maximum mortgage available. Other factors affecting the income multiple available include credit scoring, employment type and the mortgage amount.
Since October 2014, the Financial Conduct Authority (FCA), the UK financial services regulator, have limited the number of mortgages a lender can offer above an income multiple of 4.5 to no more than 15%. This means mortgage affordability is most commonly calculated using this income multiple. However, many of those who would be eligible for an income multiple above 4.5 don’t always want or need to stretch their borrowing above this level. This allows lenders to get creative…
On a like for like remortgage where the exact mortgage balance is being transferred from one lender to another, Santander and Nationwide will use income multiples of 5.5 and 6.5 respectively. If you’re household income is over £40k, Skipton Building Society use an income multiple of 4.75 with just a 10% deposit. Similarly, if you’re household income is over £60k, Atom Bank will use an income multiple of 5.5 with just a 10% deposit. For first time buyers looking to get on the property ladder, Nationwide will use an income multiple of 5.5, with just a 5% deposit, for single applicants with an income over £37k and joint applicants with an income over £55k. These represent just a few examples of lenders offering higher income multiples. All examples quoted are subject to underwriting.
Income multiples can make a significant difference to maximum mortgage borrowing. If you’ve been told by one lender you can’t get a mortgage for the amount you want, another lender may do it comfortably using a higher income multiple. If you’re looking to buy or remortgage; if you want to understand your full borrowing capabilities, we’re here to help with free professional advice.