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, i.e. 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 always be the best.