arrowright roundtick plus plus house 66 . 7 % cornercurve

Don't let a mortgage get in the way...

Mortgage affordability checks

Want to know how banks and other lenders conduct their affordability assessments? Get the right advice here.

Get started
continue to article

By Pete Mugleston   Mortgage Advisor

Last updated: 8th February 2019 *

How do Banks and other lenders work out their mortgage affordability checks?

We receive a large number of enquiries from people asking ‘how much will a bank lend me for a mortgage?’When all is said and done, trying to work out what mortgage you can afford really 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 works 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 lots of options available to you.

In this article we will cover:

  • How do lenders work out how much mortgage I can afford?
  • What factors could a lender give for declining my mortgage application?
  • How much will a bank lend me for a mortgage if I’m employed?
  • How much will a bank lend me for a mortgage if I’m self-employed?
  • What other forms of income are acceptable for mortgage affordability criteria?
  • Will my outgoings affect how much a bank will lend me for a mortgage?
  • How does a poor credit record affect how much mortgage I could borrow?
  • Speak to a mortgage affordability expert

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.

Don't let a mortgage get in the way

We’ll find you a qualified and regulated mortgage expert who specialises in cases like yours

  • We don’t charge you anything for our matching service
  • Our form only takes a minute, then let us do the hard work

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.

The obvious initial step is to approach your local bank or mortgage lender. But what if they won’t lend you the amount you were hoping or just flat-out decline your application? How did they reach this decision?

In order to gain an understanding of how much mortgage you can afford it’s important to appreciate what affordability guidelines and general rule of thumb lenders will use when deciding how much they will allow you 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. For example, if your annual salary was £30,000 and you approached a lender for a mortgage who used a ratio of 4:1 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.

How do lenders assess affordability now?

In 2014 the Financial Conduct Authority (FCA) issued new mortgage affordability guidelines after issuing a report called the Mortgage Market Review (MMR). The new rules now dictate that all UK lenders must conduct far greater scrutiny and analysis before approving 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 4x salary, some will use 5x salary and a few may use 6x salary (depending on circumstances).

In order to fully establish how much you can afford for a mortgage, a lender needs to analyse particular affordability criteria in greater detail, such as:

  • 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.

Why would a lender decline my mortgage application?

There’s a number of factors, based on their affordability criteria, 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
  • 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.

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

Every mortgage lender, will use their own affordability criteria 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.

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.

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

The good news is 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.

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 (for statements and payslips it’s usually the last three).

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 self-employed a mortgage lender’s affordability guidelines still work broadly the same way with the major difference relating to you can evidence 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 a sole trader or 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 and a few will consider 12 months) 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.

Ltd company directors and contractors

For a director of a limited company most lenders will focus on both salary drawn and any dividends paid. If you’re a contractor, lenders will look at your daily rate, multiply this by five days a week and then use a number of working weeks (say, 49 to account for any holidays) to assess your annual earnings.

For example if your daily rate was £250 per day over a 49 week trading year the equation would be: £250 x 5 x 49 = £61,250 annual equivalent earnings.

Regardless of how you are classified for self-employed purposes, the length of time you have 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 a 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.

[H2] 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 purposes, 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 with us and we will arrange for a specialist in this area to speak with you.

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

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 affordability assessments. 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.

How does a poor credit record affect how much mortgage I could borrow?

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.

In the right circumstances, it is possible to get a mortgage with the following:

  • Late payments
  • Defaults
  • CCJs
  • Mortgage arrears
  • Debt management plans
  • IVAs
  • Bankruptcy
  • Repossession

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

Worth adding a section on age because if you’re retired, that will affect the level of risk and therefore may impact on the amount a lender is willing to offer you

Worth adding non-standard construction - higher risk so some lenders might ask for more deposit

Add a section here for the bank comparison keywords - this should be a call to action section explaining that customers can compare how much each lender will offer them and at what rates by getting in touch. Explain that the whole-of-market advisors we work with will compare all of the deals they’re eligible for and single out the best one.

Why you should speak to an expert mortgage broker

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

Speak to a mortgage affordability expert

If you have questions and want to speak to an expert for the right advice, call Online Mortgage Advisor today on 0800 304 7880 or make an enquiry here.

Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances.  – We don’t charge a fee and there’s absolutely no obligation or marks on your credit rating.

Updated: 8th February 2019
OnlineMortgageAdvisor 2019 ©

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 info 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.