Your residential mortgage affordability, how much a bank will lend to you, is a calculation based on your income and your expenditure. Each bank calculates this differently, takes different factors into consideration and therefore produces a different maximum figure.
A bank may often quote loan-to-income (LTI) multipliers which represent the maximum you could borrow based on your income, before looking at your expenditure. For example, a household income of £50,000 multiplied by a LTI of 4.75x would mean maximum mortgage borrowing of £237,500. The LTI you’re eligible for will depend on the lender in question, your level of household income and the loan-to-value (LTV) of your mortgage. A higher level of income and lower LTV will often mean you’re eligible for a higher LTI multiplier.
In this blog, we’re going to take a closer look at what factors reduce this maximum amount, calculated from applying the LTI multiple, that you can borrow. Generally termed “expenditure”, it isn’t just about food and household bills. This ‘basic essential expenditure’ is already accounted for in a lender’s affordability calculation as per FCA regulation.
The following represent the most common examples of circumstances specific to the unique customer which a lender may reduce the borrowing amount for. Maximum borrowing is not always reduced, depending on the level/duration of the expense and how the lender treats that type of expense:
- Credit Commitments – Personal loans, car finances and credit cards not cleared monthly. Existing credit commitments are the most common factor which reduces how much people can borrow. Even when the debt has been perfectly managed and all payments have been paid on time, a bank must consider your overall level of debt and existing monthly payments when looking to offer you a mortgage.
- Dependents – Whether it’s children or elderly relatives in your care, a bank will want to know how many people in the household are dependent on the income earned by the household. With children, lenders will usually want to know the age of them before determining what effect that has on the mortgage affordability.
- Child Maintenance – For those who have children, but the children do not live with them, they will often pay child maintenance each month to the ex-partner who has the children. This often decreases the amount that can be borrowed on a mortgage.
- School/Nursery Fees – Whether it’s private school fees, nursery fees or other childcare costs, a lender will factor these into their affordability calculator as they represent a quantifiable expense specific to the applicant.
- Ground Rent/Service Charge – All leasehold properties can be and usually are charged ground rent as per the terms of the lease. Flats are also subject to service charge for maintenance of communal areas and shared facilities such as lifts, stairways and corridors. A lender will want to know what these charges are as they can vary significantly depending on the property.
- Mortgage Term – A slightly different factor but when looking for a specifically short mortgage term, a lender will likely offer a reduced maximum borrowing amount. With some lenders, this is done in a more linear fashion whereas other lenders will allow near maximum borrowing amounts, based on LTI, until the mortgage term drops near single digit years before then significantly decreasing the amount available.
Different lenders will offer different LTI multiples and assess your expenditure in different ways. This means if one bank has told you can’t borrow enough, another lender may be able to let you borrow what you need. Just another way in which speaking to a professional can help you get what you need!