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By Pete Mugleston | Mortgage Advisor

Pete has been a mortgage advisor for over 10 years, and is regularly cited in both trade and national press.

Updated: 20th November 2020*

Trying to work out what mortgage you can afford is the crux question we all need to know when we’re thinking of borrowing money to buy a property.

Establishing how banks and other lenders’ mortgage affordability criteria work in order to find an answer to this question can prove difficult. The good news is, because all lenders work to their own guidelines, there’s normally lots of options available to you.

Jump to our calculator journey to establish what you can afford and the costs of the best deals tailored to you.

In this article we cover:

Once you’ve read through the information below, make an enquiry with us so we can arrange for a mortgage expert to contact you directly and look in more detail at your own personal circumstances.

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How do lenders work out how much mortgage I can afford?

When you’re looking to buy a house, whether as a first-time buyer or looking to move from your existing property, the first thing you need to establish is how much you can borrow for a mortgage. A mortgage lender will work this out by carrying out a thorough affordability assessment.

In order to gain an understanding of how much mortgage you can afford it’s important to appreciate what affordability guidelines and general rules of thumb lenders will use when deciding how much they will allow you to borrow.

What is a mortgage affordability assessment?

This is a series of checks your mortgage lender will carry out to make sure you can afford to repay the finance you’re hoping to borrow.

Up until 2014, lenders would use a very simple formula, which involved a multiple of your income, known as a mortgage to earnings ratio (or income multiple) For example, if your annual salary was £30,000 and you approached a lender for a mortgage who used an income multiple of 4x they would consider lending you up to a maximum of £120,000 (4 x £30,000).

This formula provided a very straightforward way of working out how much you could borrow for a mortgage. The problem, though, was that a mortgage to earnings ratio only looks at gross income and, therefore, doesn’t give a complete picture of affordability.

What is the assessment process now?

In 2014 the Financial Conduct Authority (FCA) issued new mortgage affordability guidelines after issuing a report called the Mortgage Market Review (MMR). The rules now dictate that all UK lenders must conduct far greater scrutiny and analysis before approving any new lending.

All mortgage lenders still use a multiple of someone’s income when initially assessing how much they can borrow but this is merely the starting point. Every lender uses their own ratio for this purpose, therefore, some may be more generous than others. Most lenders will use an income multiple of 4.5x salary, some will use 5x salary and a few may use 6x salary (depending on circumstances).

What questions will I be asked during my assessment?

To fully establish how much you can afford for a mortgage, a lender needs to analyse particular affordability criteria in greater detail during your initial assessment. Expect them to ask you questions about…

  • Your employment status.
  • Total gross income.
  • Any allowances you may be entitled to (and how they’re paid).
  • How your outgoings affect overall disposable income.
  • Your credit history.

Following their affordability assessment, if a lender has concerns regarding any of the factors listed above, your mortgage application may be declined or you might be offered less than you applied for.

Why is a mortgage affordability assessment important?

These risk assessments are important because a mortgage lender needs to safeguard you and themselves. They need to be absolutely sure that you will be able to afford the mortgage you’re applying for, because if you’re unable to make your monthly payments, your home could eventually be repossessed.

This would obviously be bad news for you, but also for the lender, as their income would take a hit from the interest payments they’d be missing out on, plus they’d be lumbered with a property to sell.

How long does a mortgage assessment test take?

Mortgage lenders can provide you with an estimate for the amount you could borrow in a matter of minutes, but there are many other checks that must take place before the assessment process is completed.

During their initial checks, a mortgage lender will take a look at your income, outgoings and credit report, among other things, but will only carry out a soft credit check at this point. A hard credit search won’t be carried out until the underwriter takes a deeper look at your finances later in the process.

The entire process, right up to mortgage approval, can take anywhere between two and six weeks to complete. You can help keep the delays to a minimum by applying through a mortgage broker.

What happens during the underwriter’s reassessment?

Your mortgage application will be cross-checked and reassessed by the underwriter. They will take a closer look at…

  • Your credit history
  • The property you’re buying
  • Affordability
  • Your eligibility

The purpose of underwriting is basically so the mortgage lender can be absolutely sure you’re eligible for the product you’re applying for. This helps mortgage providers detect any changes of circumstance that may have taken place since the application was initially filed, the possibility of fraud and any historic credit issues the customer might have.

Why would a lender decline my mortgage application?

There are a number of factors, based on their mortgage affordability checks, that may give a lender sufficient concern and conclude that you are unable to afford the mortgage you have applied for, such as:

  • Insufficient income.
  • Income type is not accepted by the lender (i.e. some lenders don’t allow borrowers to declare commission/self-employed/benefits).
  • Outgoings leaving little or no disposable income.
  • Too many other debt commitments.
  • Salary allowances (commission, location) not taken into account by lender.
  • Mortgage to earnings ratio used by lender too low.
  • You have bad credit.

If you’ve been declined by a lender, having failed their affordability assessment, the important thing is not to despair. All mortgage lenders use their own affordability criteria, therefore, each lender will reach their own conclusions as to what mortgage you can afford.

If you make an enquiry with us, we can ask an advisor we work with to contact you and provide more information as to how banks and mortgage lenders work out their own affordability criteria.

All the brokers we work with are whole-of-market brokers with access to all the UK lenders across the UK. They will be happy to answer all your questions and help you secure the mortgage you need at the best possible price.

Call 0808 189 2301 or make an enquiry. The service we offer is free, there’s no obligation and we won’t leave a mark on your credit rating.

How much will a bank lend me for a mortgage if I’m in full-time employment?

Every mortgage lender will conduct their own mortgage affordability checks when assessing an application. What one lender takes into account may differ from another.

If you’re an employee and receive a basic salary, this would be viewed as guaranteed income, and therefore, a lender would take 100% of this income source into account for any mortgage earnings ratio equation and affordability assessment.

How long do I need to have been employed for?

Time in the role is also an important factor. Most lenders would prefer at least 12 months with the same employer, some would accept 6 months and a few would accept only 3 months, some will accept day one or even future-dated employment.

Will other income be taken into account?

In addition to basic salary, it’s quite common these days for employees to have the opportunity of earning additional income through regular bonuses, commissions or overtime.

An employee may also be contractually entitled to certain allowances, such as for a car or public transport, housing or for relocation purposes.

If any of this applies to you, take a look at our guide to getting a mortgage with bonus or commission income or make an enquiry to speak with a broker.

How are all these forms of additional income treated by mortgage lenders when assessing affordability?

Most lenders will happily include all of these forms of income when assessing how much mortgage you can afford. However, unlike your basic salary not all lenders will necessarily accept the total amount. Some lenders will look at using all of the income, others might use a percentage of it.

How do I evidence my additional income?

For additional income sources such as regular bonuses, overtime and commission payments most lenders will accept 50%, some will accept 75% and a few will accept 100% upon receipt of documentary evidence or a letter from your employer.

Some lenders may also want to see evidence of a regular track record of payments (particularly for commission) before taking any additional income into account. This evidence can be provided through payslips, bank statements and employment contract, we’re often asked how many payslips you need for a mortgage and it’s usually the last 3 months but some lenders may ask for longer.

Most lenders will also accept allowances written into your employment contract and include 100% of the amount when conducting their affordability assessment.

A lender will likely want to see a copy of your contract in order to clarify the amounts which have been declared. In the case of a housing allowance, some lenders may want to see that the allowance is permanent rather than for a specific term.

The table below illustrates the effect additional forms of income can have on the mortgage you receive.

Basic Salary Regular Annual Bonus* Annual Overtime Pay* Annual Commission* Total Contractual Allowances 4:1 Income Ratio (Just Salary) 4:1 Income Ratio (Inc.Other Income)
£30,000 £20,000 £0 £0 £10,000 £120,000 £240,000
£50,000 £0 £0 £0 £20,000 £200,000 £280,000
£20,000 £0 £0 £60,000 £0 £80,000 £200,000

* = Bonus/Overtime/Commission capped at 50%

As you can see, the inclusion of additional forms of employment income can make a significant difference to how much mortgage your lender may allow. In particular the final example suggests a difference of £120,000.

If you make an enquiry with us we can arrange for a specialist who fully understands how lenders treat different forms of employment income to contact you directly.

How much will a bank lend me for a mortgage if I’m self-employed?

If you’re looking for a self-employed mortgage, a lender’s mortgage affordability checks still work broadly the same way although you will have to provide evidence of how your earnings have been raised.

For employees it’s all relatively straightforward, based on salary plus any additional allowances or bonus/commissions. Any proof required can be done through payslips, employment contracts and recent bank statements.

If you’re self-employed your earnings are based on the profits from your business. For affordability purposes, a mortgage lender will want to see evidence of a solid trading record over a period of time which clarifies the information on the application.

There are different types (or classifications) of self-employed, namely:

  • Sole trader/partnership
  • Contractor / Freelance
  • Director of limited company

Mortgage lenders will treat these three classifications differently when assessing affordability.

Sole trader / partnership

If you’re looking for a mortgage as a sole trader or you’re in a partnership, lenders will focus on the net profit you have drawn from the business and most will then want to see a trading record over a period of 3 years (some will accept 2 years and a few will consider self-employed mortgage applications based on 1 year’s accounts) to formulate an average.

So, for example, if your net profit over the last three years equated to £30,000 then that figure is used as part of the affordability assessment.

Limited company directors

When assessing mortgages for company directors, most lenders will focus on both salary drawn and any dividends paid. Typically, company directors will take a low salary and receive the rest of their income via dividends. So if you take £8,000 salary and £20,000 dividend lenders will use £28,000 when assessing your income for affordability.

However a lot of company directors retain some of the profit within the business, choosing not to take all of their earnings out of the company as this mitigates personal tax liabilities. This can then mean the income from salary and dividends is way below the income needed to pass the lenders’ mortgage affordability checks. The good news is that our specialist brokers have access to lenders who can look at using the net profit of the company alongside the directors salary.

Contractors

With mortgages for contractors, lenders will look at your daily rate, multiply this by five days a week and then use a number of working weeks (e.g. 46 to account for any holidays) to assess your annual earnings.

For example, if your daily rate was £250 per day over a 46 week trading year, the equation would be: £250 x 5 x 46 = £57,500 annual equivalent earnings.

Regardless of how you are classified for self-employed purposes, the length of time you’ve been trading will also be scrutinised as part of a mortgage lender’s affordability assessment.

How long do I need to have been self employed for?

Most lenders will want to see a trading track record of at least 3 years, some will accept 2 years, a few will accept only a 12 month track record and a handful can even consider less than 12 months in the right circumstances.

If a mortgage lender requires evidence to clarify the amounts you disclose, they will usually want to see your certified accounts (usually the last 3 years if available) or an HMRC SA302 form.

If you’re self-employed and wish to receive further advice in this area get in touch and we can arrange for a specialist to speak to you directly.

What other forms of income are acceptable for mortgage affordability criteria?

Not all income is derived through earnings (whether employed or self-employed). There are different types of unearned income which may also be put forward to be assessed for mortgage affordability checks, namely:

  • Benefits income
  • Retirement income
  • Rental income
  • Investment income
  • Trust income
  • Maintenance payments

How these income sources are assessed depends on the particular mortgage affordability criteria of a lender, as they will all treat these earnings differently.

For example, most lenders will accept at least 50% of all state benefits declared on an application, some will consider 100% with an award letter provided as supporting evidence.

If you have income from any of the above sources and want to find out what mortgage you can afford, get in touch or call 0808 189 2301 for a free, no obligation chat with one of the specialist advisors we work with.

Will my outgoings affect how much a bank will lend me for a mortgage?

Yes, they will. As mentioned previously, the introduction of the Mortgage Market Review (MMR) in 2014 ensured all UK mortgage lenders, when assessing affordability, must consider both gross income and outgoings.

Most general expenditure items would be taken into account to assess how much disposable income is left each month, such as:

  • Food and grocery bills
  • Utility bills
  • Debt repayments

With debt repayments lenders will be looking at both the balance and/or the monthly repayment on a debt. They will then annualise that debt to confirm the impact on your mortgage affordability.

As an example, a loan or hire purchase for £250 a month will become £3000 annually (£250 x 12) and this will be deducted from your annual income. So for an applicant on £30,000 they will effectively be on £27,000 once the loan is deducted.

For credit cards lenders will normally use 3% of the balance as a monthly commitment.

Every lender takes a different view of debt repayments, with some capping or declining loans if there is a lot of debt, others will ignore debts with less than 6 months to run or debts that can be cleared before completion.

What outgoings are lenders likely to ignore?

Some lenders will ignore any outstanding loan or credit card payments on the agreement that these are all cleared before any mortgage would commence. There are a number of other outgoings that some lenders may also be prepared to ignore for affordability purposes, namely:

  • School fees
  • Pension contributions
  • Private healthcare
  • Travel season ticket loans
  • Sharesave schemes
  • Charitable donations

As well as current outgoings, mortgage lenders will also want to conduct a stress-test of your future finances in the event of an unexpected change in your circumstances such as a sustained increase in interest rates or if you were ever unable to work due to an illness.

As mentioned many times in this article, it cannot be stressed enough that all lenders use their own guidelines when conducting their mortgage affordability checks. If you make an enquiry with us we can put you in touch with a mortgage affordability expert who will understand what each lender will require.

Does a poor credit record affect how much mortgage I could get?

A poor credit history can, no doubt, cause problems with how much a lender may be prepared to lend you or result in them turning you away altogether, depending on the type of issue you’ve had and when it was registered.

The good news is there are some lenders who will look at applications from borrowers who have had credit issues in the past and a few who specialise in these types of applications.

For more information about getting a mortgage with adverse credit on your file, consult our dedicated article on bad credit mortgages.

How much can I borrow? A mortgage comparison will help you find out!

Every lender uses their own mortgage affordability checks and eligibility criteria, so the amount they’d be willing to let you borrow will vary across the board.

The best way to establish the maximum mortgage amount you’d qualify for is to make an enquiry and speak with one of the brokers we work with. They can conduct a whole-of-market comparison to find out exactly how much each mortgage provider would be happy to lend you.

This is the best way to compare mortgage deals, as doing the legwork yourself could mean potential marks on your credit report (too many hard credit checks for a mortgage can have an impact on your file) and ending up with unfavourable rates.

Make an enquiry and the experts we work with will compare mortgage deals on your behalf.

Speak to a mortgage affordability expert

At Online Mortgage Advisor we can offer you a first-class service tailored to your own specific needs with access to the most experienced brokers available that:

  • Have whole-of-market access
  • Have excellent relationships with lenders
  • Are OMA accredited advisors
  • Have completed a 12 module LIBF accredited training course

If you have questions and want to speak to an expert for the right advice, call 0808 189 2301 or make an enquiry.

We’ll match you with one of the brokers we work with, ensuring that they have the right expertise for you circumstances.

We don’t charge a fee for the service and there’s absolutely no obligation or marks on your credit rating.

Updated: 20th November 2020
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FCA disclaimer

*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.