Understand how lenders assess affordability and what determines the size of the mortgage you can get.
Most people start their property search with a rough figure in mind. Lenders, however, arrive at their own number using a fairly consistent set of tests. Knowing what those tests are makes it far easier to work out what you can realistically borrow — and to avoid falling in love with a home that was never going to be affordable.
Income multiples: the starting point
Almost every lender begins with a multiple of your gross annual income. Around four to four and a half times income is the common range, and lenders are subject to regulatory limits on how much of their lending can sit above four and a half times. Some will stretch further for higher earners, or for professions such as medicine and law where income is expected to rise sharply.
For joint applications the calculation is usually based on combined income, though some lenders weight a second income differently. Bonuses, commission and overtime are often counted only in part — typically fifty per cent, and usually only where you can evidence them over two years or more.
Affordability testing does the real work
The income multiple sets a ceiling. What actually decides your figure is the affordability assessment, which looks at what is left over each month once your commitments are paid. Lenders will deduct:
- Credit cards, loans, car finance and buy-now-pay-later balances
- Childcare costs, school fees and maintenance payments
- Student loan repayments
- Council tax, utilities, insurance and travel
- An allowance for essential living costs, usually based on national benchmark data and the number of people in the household
Lenders also stress test: they check whether you could still afford the repayments if interest rates rose from the rate you are being offered. This is why the amount you are offered can move even when your salary has not.
Your deposit changes the arithmetic
Deposit size determines your loan-to-value, or LTV, and lenders price in bands — commonly at 95%, 90%, 85%, 80%, 75% and 60% LTV. Crossing into a lower band usually unlocks a better rate, which in turn improves affordability. Pushing your deposit from, say, 9% to 10% of the purchase price can be worth more than the extra cash you put in.
At the highest LTVs the choice of lender narrows and rates are higher, so if you are close to a threshold it is often worth waiting or negotiating slightly harder on price.
Credit history and conduct
Lenders check your credit file for missed payments, defaults, county court judgments and how close you run to your credit limits. A thin file — little borrowing history at all — can be as much of an obstacle as a poor one. Check your file with the main agencies before you apply, and avoid opening new credit in the months leading up to a mortgage application.
Employment type
Employed applicants on a permanent contract have the simplest route. If you are self-employed, a company director or on a contract, expect to provide two to three years of accounts, tax calculations and tax year overviews. Some lenders will work from one year’s accounts, and specialist lenders take a more flexible view of contractors by annualising a day rate.
Term length
Spreading the loan over a longer term lowers the monthly payment and therefore increases what you can borrow. It also increases the total interest you pay over the life of the loan, sometimes substantially. Longer terms that run past your expected retirement age will need to be justified to the lender.
Agreement in principle versus a full offer
An agreement in principle is an indicative figure based on information you supply and a credit check. It is useful for showing agents you are serious, but it is not a commitment. The binding number comes with the formal mortgage offer, after full underwriting and a valuation of the property. Valuations can come in below the agreed price, which reduces the loan and leaves you to make up the difference.
Should you use a broker?
Criteria vary enormously between lenders, and the differences matter most in the cases that are not straightforward: self-employment, variable income, adverse credit, unusual construction types or older applicants. A whole-of-market broker can identify which lenders will look favourably on your circumstances, which saves both time and unnecessary credit searches.
This article is general information, not financial advice. Lending criteria and regulatory limits change — confirm current rules and figures with a lender or a qualified mortgage adviser before making a decision.
