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How much can I borrow for a mortgage ?

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For todays’ “How” on Google, we will shed light on what affects the amount you can borrow on a mortgage. 

Most Common “How” Google questions on Mortgages answered.  

In this new series we try to answer the most common questions on mortgages Googled by the public.  

Later in the series we will cover “What”, “Where”, “When”, “Which” and “Why” questions.  

The idea of these posts are to provide non-finance experts with guidelines, so they can make informed decisions regarding property finance. 

Series A: “How” questions.

Question 3 : how many multiples of income can I get for a mortgage?

In the old days of less regulation, it was a simple calculation based on income multiples that lenders used to decide how much to lend to a particular customer. Fixed and committed outgoings were not strictly factored in to income multiples. There was even, what was called self certified mortgages, where applicants were allowed to declare their own income in-return for a larger deposit.

After the market crash at the end of the last decade, the financial regulators instigated stronger checks on affordability for mortgage lending. Fall in property prices and jobs left many homeowners unable to pay their mortgage, leading to increased repossessions, while making some owners mortgage prisoners due to negative equity and inability to remortgage.

To prevent such issues lenders are requested to strictly check affordability levels for all residential mortgage and somewhat for buy to let mortgages (although part is sustained by the rent) these days.

So how much can you borrow. Lenders use numerous criteria to assess affordability. It is still roughly based on income multiples. Lenders won’t admit it, but there is a ceiling. For example, you won’t be able to borrow 10x income irrespective of how much you earn. However, the calculation is more nuanced and multiples are graduated. So it is not easy to establish until a decision is obtained. Lender will also tweak this based on market conditions.

If you fulfil all the requirement you get the highest multiple. If not, it’s reduced.

Nine factors that will determine your loan amount. 

  1. Credit profile and not the score. How credit is conducted is more important than the score. Not having adverse credit such as late payments, defaults, county court judgements etc, will give the highest multiples. How long ago the judgement resulted also affects the score; as well as if it is satisfied at application. Lenders that lend to adverse credit tend to only give 3.5 – 4.25x income. 
[Low credit score is not always a reflection of credit status as it may be due to lack of credit rather than poor credit conduct].
  2. Monthly outgoings. If you have high levels of fixed expenditure such as loans, credit cards, travel costs etc, there is an impact on the maximum loan. 
Outgoings that cannot be avoided are annualised and deducted from the income before income multiples. For example, if you pay £100 per month for a loan, the annual income will be reduced by £1,200 (100×12) before multiples.

    Outgoings are not just deducted from income.  The amount compared to total income also matter.  It is called the Debt to income ratio or DTI

  3. Level of income. Higher the income higher the income multiples. Some lenders will give 4.75x income as standard, however, if the income is above £60,000 it can be 5x and over £80,000 even 5.5x.
Specialist lenders can provide 5x income even at a lower income, subject to credit profile, but at a higher rate.
  4. Financial dependants – bigger the family lower the level of lending. Costs of childcare and school fees can be taken in to account.
  5. Type of job or job security. Employment deemed to be secure are preferred for lending. So ‘professions’ such as Drs, Solicitors, Teachers can have a higher multiple. 
There are special considerations for IT contractors, where the calculation is based on day rate rather than tax returns.
    Company Directors with over 20% shareholding have two options to maximise their borrowing.  Some lenders will use salary + dividends to calculate the loan, whilst other lenders can use salary + net profit after corporation tax.
  6. Kind of contract – permanent, non-guaranteed regular or zero hour. 
If the income is shown to be consistent, even if it is zero hours, some lenders will consider it. 
Full or part time and the number of hours worked also impact. If the job or (combinations of) jobs involve too many hours, it is considered unsustainable and a higher risk in the long term.
  7. Level of deposit – self evident. Higher the deposit less risk to lender. Some high street lenders will advance 4.75x up to 85% LTV, but only 4.5x above this. Larger deposit is not only good for higher multiples, but also give a better rate.
  8. Rate tie-in period – a longer fixed rate period gives lender more security on affordability. So higher lending for fixed rates of 5 years or more.
  9. Age – shorter the time to retirement, lower the multiple. When you are paying capital and interest, shorter the time to repay, higher the monthly payment needs to be. So less affordability.
    The reverse is, the maximum loan can be increased by choosing a longer payment period.  Lenders can allow 35 – 40 years term.  Term must end before retirement.

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Lenders return to 95% First Time Buyer deals.

Income multiples up to 5x

How can I raise more money on my property?

Remortgage, Further Advance or Second Charge.  Three options to raise capital on your property.

Most Common “How” Google questions on Mortgages answered.  

In this new series we try to answer the most common questions on mortgages Googled by the public.  

Later in the series we will cover “What”, “Where”, “When”, “Which” and “Why” questions.  

The idea of these posts are to provide non-finance experts with guidelines, so they can make informed decisions regarding property finance. 

Series A: “How” questions on remortgages.

How – Question 2.

For todays’ “How” on Google, we will shed light on the ways additional money is freed on a property.   There are several common “how” questions on the topic, looking for the same answer. 

How to remortgage to release equity?

How can I raise more money on my property?

How do I get a second charge loan?

In the previous question about rate change we addressed one meaning of the term remortgage.  For most of the public, a remortgage is same as a product switch as they achieve the same result.  Similarly, when it comes to releasing equity in a property, remortgage for additional capital  can have the same meaning to the layman as it produces the same outcome, but to a professional it can be three different processes. 

  1. Raising capital on outstanding equity with the same lender is called a further advance.
  2. Changing lender and increasing the loan at the same time to free up equity from the property is called a remortgage. 
  3. Staying with the current lender, but raising capital with a different lender is called a second charge.

In general these conditions apply to both residential and buy to let property.  This does not cover Equity Release type / Lifetime Mortgages for over 55s. 

There are many reasons people raise additional funds from their property.  These could be for home improvements, repaying debt or even investing in another property.  

Why would you use one option over another?

This comes down to several factors.

  • Type of existing mortgage.
  • Fees
  • Penalties
  • Income multiples
  • Property value.
  • Rental assessment (BTL).

1. Further Advance.

This is when you ask the existing lender to increase the mortgage and lend you more money based on the equity on the property.  

Let’s say you are in the middle of a special rate period, such as a fixed rate for 5 years.  It is likely there will a penalty (redemption) to move the mortgage to a different lender.  So the first call is to ask the existing lender for additional money.

Disadvantages 

  • the current lender may not do a new valuation, instead rely on an average house price indexation calculation to determine the value.  So it might not reflect a true increase in market value – which can lower the additional funding available.
  • Maximum can also be restricted to lender’s income multiples or rental assessment (BTL).  These might be lower than someone else’s. 
  • lender’s appetite for lending.  They may not want to increase their risk on the property/applicant.  
  • the further advance is treated as a new loan and will go on a new rate.  This might not be market leading.  
  • unlikely to agree a further advance if credit status has deteriorated.  

Advantages

  • low fees: low application fee or the fee is based on additional borrowing only and may not require a new valuation fees.
  • lender has your history of payment.
  • no redemption penalty.
  • quickest option when capita raising.

2. Remortgage to a different lender. 

If the existing lender refuse to give the required funding, the next option is to move the mortgage to new lender.  Changing the lender will be  treated as a new mortgage application.

Disadvantages

  • if the current mortgage is in the middle of a special rate e.g. fixed rate, discounted rate etc, there is likely to be penalties to leave to another lender.  In general the penalties are a percentage (%) of the loan in descending order.  On a 5 year rate this could be 5%, 4%, 3%, 2%, 1% or 3%, 2%, 1% on a 3 year rate.  Therefore the cost of moving can be too high in the middle of the special rate.  
  • there can be other fees, application fee, solicitor fee.  Although most high street lenders these days offer free valuations and possibly legal costs on a remortgage.
  • you will be credit scored and your financial status assessed by the new lender.  If your credit status has declined since the current mortgage, you may not get a comparable beneficial rate.  
  • takes longer as it is a new application and needs to go through the legal process.

Advantages

  • your property will be appraised new, consequently the loan can be based on the latest market value. 
  • the new lender might provide higher loan to income (LTI) multiples allowing you to borrow more. 
  • the whole loan can go on a single beneficial rate.  Compared to additional borrowing through a further advance.  Which is treated as an add-on loan and have a different rate (likely higher) to the main loan.
  • your income may have increased allowing increased borrowing limits.  

Lenders for illustration purposes only.  Other suitable lenders also available. 

3. Second charge mortgages

If the penalty on an existing mortgage is too prohibitive to remortgage and the existing lender is unable to provide the required additional funding, the option is to obtain a top-up loan from a different lender.  This is still secured on the property, i.e. a second charge.  Meaning this lender is second in line to recover their monies if the property is to be repossessed.  

Important: the lenders that provide second charge loans tends to be specialist financial institutions.  The average high street lender does not provide second charge lending. 

Disadvantages

  • fees plays a major role, when it comes to deciding if a second charge is the best option.  It is important you identify all the potential fees before going ahead with an application.  There can be a huge variation in the fees charged by different brokers.  Some can charge 10% – 15% of the loan amount.  Best is to keep away from those type of brokers.  
  • Second charge loans tend to have a higher rate.  Partly due to most people using second charges when they are unable to obtain a further advance from the existing lender.  This allow specialist lenders to charge a higher fee.  
  • LTV restrictions may also apply and can limit the total amount that can be borrowed.  
  • A 2nd charge loan also require consent from the first charge lender.  If you have fallen in to arrears on the main loan or had missed payments, the main lender can refuse consent for another lender to put a charge on the property.  

Advantages

  • lending can be more flexible.  Second charge lenders tend to use higher income multiple and are more generous in taking in to account all types of income, such as non-guaranteed or regular income.  Therefore can lend more.
  • allows to retain the existing main loan without loosing a beneficial rate or paying an Early Redemption Penalty to remortgage.
  • greater flexibility for the reasons allowable for raising capital.  Some primary lenders can restrict the reasons for additional funds.  
  • can allow some adverse credit.

Check out our decision tree on options at time of rate change.

Criteria that affects your borrowing level.

If you like our posts and find them useful why not join our twitter so you will not miss any future post and mortgage related news.  Join us at @axess_fs