How much can I borrow?
Mortgage Guide Part 2
Affordability & Debt to income ratio
Maximum loan advance is based on the affordability of loan repayment. As a general guidance to qualify for a mortgage, high street lenders prefer monthly loan and other fixed credit related payments to be less than 45% of the gross salary or income before tax and national insurance. This is called the debt-to-income ratio (DTI).
To calculate DTI, add up all obligatory fixed monthly outgoings for loans and credit, i.e. personal loans, higher purchase, credit cards & store cards (minimum 5% of balance even if zero payment currently), student loans, car loans, child support*, insurance* (life & building insurance), council tax*, new monthly mortgage and ground rent & service charges (flats only). Then divide by monthly salary as a percentage.
DTI = Fixed monthly outgoing x 100%
Gross monthly salary
[*Some lenders will exclude child support, insurance and council tax]
2b. Income multiples
Once you qualify based on DTI, the lender will apply income multiples to decide the maximum loan.
Maximum loan is a usually a combination of DTI and credit score. It can be specific to each lender.
- low DTI & good credit score: 4.75 – 5x income
- low DTI + high income ( >£80,000 / year) + good credit score : 5.5x income.
- high DTI : 4.5x income
- low income e.g. up to £20k / year : 4 – 4.5x
- low credit score : up to 4x
- poor credit score : up to 3.5x
The rate is important, but it should not be the only benchmark for selecting a lender.
Other objectives that may be important to you needs to be considered. Therefore, the lender with the lowest rate may not be the best suited to achieve your goal of buying a home.