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Mortgage affordability: a rule of thumb

What rule of thumb do lenders use when establishing how much someone can borrow for a mortgage?

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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: 27th August 2019 *

While there’s no ‘one size fits all’ answer to this question, the good news is that each lender uses their own rule of thumb and mortgage affordability criteria, which means some providers may be more generous than others when reviewing your application. So if you’ve been declined for a mortgage in the past or offered unfavourable rates, don’t give up - there could be other options available to you.

This article aims to dispel the myths around mortgage to income rule of thumb, and you’ll find the following topics covered below...

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Which mortgage to income rule of thumb do lenders use to determine what mortgage I can afford?

Whether you’re a first time buyer or looking to move house, the first step you need to take, if you need a mortgage, is to work out exactly how much you can borrow. In order to do this you need to understand what affordability rule of thumb a lender may use to determine how much mortgage you can afford.

Prior to 2014, the traditional rule of thumb used by lenders would be a simple mortgage-to-earnings ratio or, basically, a multiple of someone’s income from their job. So, for example, somebody with a salary of £25,000 applying for a mortgage with a lender who uses a mortgage to earnings ratio of 4:1 (4x a multiple of their income) would be able to borrow a maximum of £100,000 from that lender.

Standard income multiple criteria is a very uncomplicated way of working out the maximum you can borrow for a mortgage, however, it only really tells half the story and does not provide a lender with a complete picture of affordability.

How are things different now?

In 2014 the Financial Conduct Authority (FCA) issued new mortgage affordability guidelines after issuing a report called the Mortgage Market Review (MMR). These new rules stipulate all UK lenders must take greater responsibility by providing much greater analysis for the lending they approve.

Does the mortgage to earnings ratio rule of thumb still apply?

Mortgage to earnings ratios are still a key rule of thumb used by lenders to determine the mortgage you can afford. However, not all lenders use the same ratio, therefore, some can be more generous than others. Most lenders will use an income multiple of 4-4.5x salary, some will use 5x salary and a few will use 6x salary.

In the next section, we’ll look at some practical examples to illustrate the impact different mortgage to earning ratios can have when working out mortgage affordability.

How can I work out how much mortgage I can get using a mortgage to income rule of thumb?

As mentioned above, lenders use a very basic mortgage-to-income rule of thumb to initially establish the maximum amount an applicant can borrow before conducting a more in-depth affordability assessment.

Not every lender will use the same ratio or income multiple, therefore, the maximum amount you can borrow can fluctuate quite a bit dependent upon which lender you choose, as illustrated in the table below.

Income Amount Mortgage to earnings ratio - 4:1 Mortgage to earnings ratio - 4.5:1 Mortgage to earnings ratio - 5:1 Mortgage to earnings ratio - 5.5:1 Mortgage to earnings ratio - 6:1
£30,000 £120,000 £135,000 £150,000 £165,000 £180,000
£40,000 £160,000 £180,000 £200,000 £220,000 £240,000
£50,000 £200,000 £225,000 £250,000 £275,000 £300,000

So, as you can see from the example figures above the ratio used by a lender can go a long way to determine how much mortgage you qualify for. Some lenders are much more generous than others. For example, if you have earnings of £30,000 the disparity between what ratios a lender may use could make as much as £60,000 difference to the mortgage you are able to secure. Some lenders even apply a different ratio to different salaries so they might apply 4x to a salary of £20,000 but 4.5x to a salary of £25,000.

A mortgage to earnings ratio calculation is designed to establish the maximum amount a lender may be willing to borrow.

It’s important to stress that the affordability rule of thumb used by a lender will include an assessment of both your income, debt and outgoings before deciding whether you are able to afford the mortgage repayments. They might also decide which salary multiple to offer based on the amount of risk the deal involves, taking factors such as your credit history, deposit and the property type into account.

How to figure out how much mortgage you can afford

Rather than trying to find out what each and every lender's mortgage to earnings ratio is why not let us help? If you get in touch we can arrange for a specialist in this area to speak with you.

As we’ve already discussed, some lenders have a bigger appetite for risk than others and might be willing to offer you a higher salary multiple (x5 or 6x your earnings, rather than the standard x4-4.5).

If you want to borrow the maximum amount, you’ll need access to the entire market to give yourself the best chance of finding the lender who’s most likely to offer a favourable deal to a borrower with your needs and circumstances.

The expert brokers we work with are whole-of-market and can save you the legwork and potential marks on your credit file by conducting a lender search on your behalf - make an enquiry to speak with one of them over the phone today!

Will lenders include my total income as part of their affordability rule of thumb or just my basic salary?

An employee’s basic salary is classed as guaranteed income, therefore, 100% of this income source can be used as part of any income multiple equation or affordability assessment.

However it’s quite normal for many employees to earn additional income such as bonuses, overtime and commission on top of their salaries. They could also be entitled to any number of allowances as part of their employment contract for items such as a car, a house, or for relocation purposes.

Will lenders take into account bonuses, overtime pay or commission as part of their affordability rule of thumb?

Yes, some of them will. Not all lenders will necessarily accept the total amount of these additional forms of income. For supplemental income 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.

Will lenders take into account any allowances I receive as part of my salary package?

If you have specific allowances written into your contract of employment then most lenders will accept these and include them in their affordability assessments. A lender will likely want to see evidence of this to clarify the amounts. In the case of a housing allowance, some lenders may want to see that the allowance is permanent rather than for a specific period (say, 2 years).

So, how can these additional types of income influence how much mortgage you qualify for?

Basic Salary Regular Annual Bonus* Annual Overtime Pay* Annual Commission* Yearly Housing Allowance Mortgage to earnings ratio – 4: 1 (additional income included) Mortgage to earnings ratio – 4: 1 (additional income not included)
£25,000 £10,000 £0 £0 £5,000 £140,000 £100,000
£30,000 £0 £10,000 £0 £10,000 £180,000 £120,000
£20,000 £0 £0 £60,000 £0 £200,000 £80,000

* = Bonus/Overtime/Commission capped at 50%

As you can see from the table above, any additional forms of income can make a huge difference when determining how much mortgage you may qualify for. It’s crucial that your total income is taken into account when assessing affordability.

If you get in touch with us we can introduce you to an advisor we work with to discuss your own personal circumstances.

How does the affordability rule of thumb apply if I’m self-employed?

It all works very much in the same way. The key difference relates to how earnings are defined. With an applicant in full-time employment, affordability is based on basic salary plus any additional types of income that are included within the contract.

For self-employed mortgage applicants affordability is assessed based on the earnings from their business and, additionally, most lenders will want to see evidence of a solid trading record over a period of time which clarifies the information on the application.

To give an example of how things can be different depending on the type of contract worker you are, sole traders or partnerships lenders will typically look at income as net profit drawn from the business over an average of, say, the last 3 years. So, if the net profit averaged over the last 3 years equates to £25,000 then that is the income figure used for affordability rule of thumb purposes. Don’t worry if you haven’t got 3 years’ accounts, as lenders can work from just the most recent year.

If you’re a director of your own limited company most lenders will take into account both salary drawn and any dividends paid, although a few will look at director’s salary and net profit. For contractors; lenders will look at your daily rate, multiply this by five days a week and then use a number of working weeks (say, 48 to account for any holidays) to assess your annual earnings.

Given how mortgage lenders can treat self-employed income differently, specialist advice may be required to get the best deals. Make an enquiry to speak with a whole-of-market broker with expertise in self-employed income.

Would a lender’s affordability rule of thumb apply to my total outgoings or are any excluded?

Some lenders may be prepared to ignore certain outgoings that fall into particular categories as part of their affordability criteria, such as:

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

General expenditure would obviously not be ignored, such as:

  • Food and grocery costs
  • Utility bills (electric, gas, mobile phone)
  • Outstanding debts (credit cards, bank loans, car loans)
  • Dependent children

Some lenders may be prepared to ignore any loan or credit card payments if an applicant confirms they will be cleared before the commencement of their mortgage or if they only have a few months left to run.

Future expenditure

A lender will also want to ‘stress-test’ your future expenditure to be assured you will be able to meet your mortgage commitments in the event of an unexpected change in your circumstances such as a sustained increase in interest rates, a growing family or if you were ever made redundant.

All lenders use their own affordability criteria; therefore, you really need to speak to a specialist who understands all the different nuances. Make an enquiry and we’ll have one of the advisors we work with give you the right advice and pair you with the lender best positioned to offer you a favourable deal.

Is the affordability rule of thumb calculated differently for buy to let mortgages?

Yes it is. For buy to let properties the focus for affordability is on the amount of rental income the property generates. Lenders will use what is called an Income Coverage Ratio (ICR) to assess the amount of proposed rental income against the mortgage repayment.

Most lenders rule of thumb for the ICR is 145%, some will request 135% and a few will request 125%. This means, in the case of an ICR of 145%, if a monthly mortgage payment was £100 the rental income per month would need to be, at least, £145 for affordability purposes.  

However, some providers also have minimum income requirements for buy to let mortgages, especially if the applicant is a first-time landlord. Around £25,000 is standard. If you are an existing landlord, there is a lot more flexibility over income - some lenders don’t need any besides the rental income.

If you’re considering purchasing a buy to let property then make an enquiry with us and we can request a specialist in this field contacts you to discuss this further.

Will the affordability rule of thumb differ if I’ve had issues with my credit history?

A poor credit record can, no doubt, cause problems with a mortgage depending on the type of issue you’ve had and when it was registered. As such, it wouldn’t change a lender’s affordability rule of thumb criteria. It would, however, reduce the number of approachable lenders; therefore, the terms offered may not be as generous.

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.

Make an enquiry to speak with a specialist bad credit mortgage advisor for more information, or consult our section on bad credit mortgages.

Speak to a mortgage affordability specialist

If you are ready to establish the right mortgage for you, have a question or you’d like to know more, call Online Mortgage Advisor today on 0808 189 2301 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: 27th August 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.

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