Affordability & Debt to Income Ratio

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.

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