How much can I borrow?

The main factors which determine how much you can borrow on a mortgage are:

• Income
• Liabilities
• Amount of deposit
• Credit history
• Employment status

 

Most mortgage providers will be pleased to discuss how much you can borrow on a mortgage. The mortgage amount can vary considerably between providers and is usually calculated by using 'income multipliers'. Phrases such as '4 + 1' and '3.75 x joint' are commonly used. These are examples of income multipliers and simply mean that the provider is prepared to lend, say, four times the higher income plus the amount of the lower income (assuming, of course, that a couple is buying). A single person buying would not have a secondary income and, therefore, could borrow less on the same property than could a couple.

Example: Using the above examples of multipliers, the maximum loan available to a couple on salaries of £20,000 and £13,000 would be:

Using the '4 + 1' multiplier: £93,000
Using the '3.75 x joint' multiplier: £123,750. It is apparent from this what a difference the multiplier can have on the loan amount, and can go as high as 7 times sole income. (dependent on credit score, level of income and type of mortgage product taken)

Income may take many forms, including: salary/wages; overtime that is guaranteed; overtime that is not guaranteed; commission; unearned income (for example, investment income, property rents); bonuses that are guaranteed; bonuses that are not guaranteed; part-time income.

Each lender decides what parts of the borrower's income can be taken into account when considering the income to be used in arriving at the multiplier.

Generally, if the income is guaranteed or can be proved to have been received regularly over, say, the last three years, the lender allows the full amount of income to be included in the multiplier. If some part of the income is not guaranteed, the lender will either not allow it at all, or only allow a proportion of it to be taken into account.

Most lenders require proof of a borrower's income. This can take the form of salary slips (for example, over the last six months), P6Os for the last two years or an income reference (this is a questionnaire sent to the borrower's employer, asking for the details of income and confirmation of the permanency of the position of the borrower).

An income reference requires a company stamp and the signature of someone in authority in the employing company. The lender looks for as much security as possible in order to prevent the borrower overstating his income and borrowing more than he can repay. Such proof of income also reassures the lender that the borrower is in secure employment.

The self-employed usually have to produce three years' audited accounts as verification of the income to be used by the lender in the income multiplier. Where a borrower does not have three years' accounts, an official letter from the borrower's accountant may be acceptable. These requirements differ from lender to lender.

Self Certification mortgage

Self-certification mortgages often referred to as non-status mortgages, are available to both the employed, self employed, first time buyers and those with a bad credit history alike. They have become very popular in recent years, as working environments and practices have moved away from the more conventional 9 to 5, and where monthly income may come from several different sources. Self certification mortgages are specifically designed for people whose income is difficult to assess using the standard underwriting criteria used by most mortgage lenders.

Self certification mortgages allow you to declare your income without having to providing the documentary evidence usually required when applying for a mortgage. With self certification mortgages there is no need to supply accounts, bank statements, payslips or any other proof of income. Instead the self certification mortgage lender will conduct a credit check and credit score, and in some cases may apply for a lender reference or landlord's reference. The minimum deposit required for a self certificaton mortgage is 10%, but the majority of self certification mortgages are restricted to 85% of the property value.

 

All mortgage lenders need to ensure that each borrower can afford to repay the monthly instalments without being overstretched financially. If a borrower takes on too high a monthly commitment, the dangers are that there will be insufficient disposable income to maintain payments if interest rates increase and so push up the monthly cost of servicing the mortgage. The borrower could then run into arrears.

Ultimately, the borrower's inability to repay the mortgage may lead to repossession, resulting in considerable hardship for the borrower and additional costs and bad publicity for the lender. To avoid these dangers, the lender takes into account the prospective borrower's existing credit arrangements before assessing the amount of mortgage they are willing to lend. Existing credit includes the following:

• amounts outstanding on credit cards
• other unsecured hire purchase (HP)'agreements from finance houses
• unsecured bank overdrafts
• other mortgages on other properties
• tax bills yet to be paid (usually only relevant for the self-employed)
  

Example: A couple want to know their maximum borrowing capacity. The female's salary per annum is £19,000 and the male's salary is £9,500. They currently have a hire purchase loan for £3,100, costing £70.00 per month for the next four years, and an outstanding credit card amount of £350. They say that they usually clear the outstanding balance each month. Assuming a 'four plus one' multiplier, there are two main possibilities which most lenders consider when establishing the maximum borrowing capacity: The main method is to deduct the ongoing credit commitment from the main income before applying the income multiplier: £19,000 less £3100 = £15,900 x 4 =£63,600 + £9,500 = Total loan available of £73,100 (This is only one way that lenders use - there are others)

There is a difference in the loan amounts available, depending on the lender's criteria. Generally, a lender has to rely on the honesty of the borrower in disclosing all existing credit on the mortgage application form, although some aspects of credit can be checked through credit agencies. Very often, the borrower will have to submit bank statements, particularly if the lender feels that there is some doubt as to affordability of the mortgage repayment.

When house prices are rising many lenders are happy to lend 100% of the value of the property as a mortgage, confident that the value of the property will increase and so produce equity (a value over and above the mortgage amount if the property were to be sold) and, therefore, security for their loan. If house prices are falling as they did during the late 1980s and early 1990s, mainstream lenders are unlikely to offer 100% mortgages and will restrict their lending to a maximum of 90 - 95% value of the home.

Generally this means that most borrowers have to find a deposit of at least 5% of the price/value of the house. Indeed, some lenders insist on a deposit of 10%, or more. Whilst this is not generally a problem for second time buyers who already have equity to transfer to their new purchase, it has meant that many first time buyers have to delay plans to buy or have to borrow the deposit from a third party, often from parents or by means of an unsecured loan.

People who cannot meet the deposit requirements of mainstream mortgage lenders can raise mortgages from non-status lenders, who will generally charge more to cover themselves against the additional risks they face.

Non-status borrowers include the self-employed, people with adverse financial records and those needing 100% mortgages to enter the housing chain. The main benefits to the lender if the borrower has an equity stake in the property are as follows:

• The property is more likely to be looked after if the residents have a stake in it and, therefore, something to lose
• Putting down a deposit shows that the borrowers have a sense of commitment to the property and are people with the self-discipline to save money.
• If the property were to be repossessed, there would be an equity value available to pay the necessary bills in order to ensure that the lender does not lose out financially.
  

As far as borrowers are concerned, the main benefit of having an equity stake in their property is that their monthly outgoings will be less as they are having to borrow less and the indemnity guarantee premium will be less. Borrowers will also have a much wider choice of lenders willing to consider a mortgage application more favourably if a reasonable deposit is available.

As well as checking income, most lenders carry out independent checks to verify the borrower's 'creditworthiness' thus reducing the incidence of fraudulent applications.

Existing mortgage reference
Where the borrower has an existing mortgage, the new lender can ask for a reference to ensure that there are no arrears and that the borrower has paid instalments in accordance with the conditions of the loan. If there are any arrears, the lender may reject the loan application outright or continue to consider the application, depending on whether the borrower has disclosed the arrears and provided an appropriate explanation.

Landlord's reference.
Borrowers who are buying for the first time have often been renting a property and so become used to the running costs of a household. A lender may wish to write to the landlord to verify that the rent was paid according to the terms of the lease.

Bank reference
As mentioned earlier, the borrower may have to submit bank statements for, say, six months, providing a credit reference for the lender. Alternatively, the lender may write direct to the bank and ask for a written opinion as to the borrower's creditworthiness.

Credit bureau
Nowadays, there are many independent organisations that can provide information about prospective borrowers, such as Equifax and Experian . Such agencies have a bank of information stored according to address or full name. In exchange for a fee, they will provide the lender with details of the credit arrangements which have been recorded against the disclosed address or name. The many institutions providing credit inform these agencies of borrowers' details and the loans granted to them. Therefore, anyone else providing credit can check the existing loan details and also check whether there are any arrears or County Court Judgements (CCJ's) recorded against the borrower concerned.

A prospective borrower who has had arrears or a CCJ recorded against him/her will not be considered favourably by any lender. Often, the unpaid previous debt could have arisen as a result of a marital break-up where neither party has agreed to pay the bills, and so a judgement is eventually recorded against the property. Although the individuals may have satisfied this debt some time later, the actual judgement stays on record for some time.

Borrowers will have a Letter of Satisfaction if the CCJ has been discharged. If it is discovered that a potential borrower had previous mortgage arrears or a CCJ recorded against him/her, full details of the problem would need to be given; i.e. dates, amounts involved and full details of the circumstances in which the problem arose. If a CCJ is involved, it must be clarified if it has been satisfied an a copy of the Letter of Satisfaction should be provided for the lender.

Bankruptcy checks
The lender carries out a bankruptcy search shortly before loan completion in order to ensure that the borrower is not an undischarged bankrupt who, as an individual, would be unable to enter into any contracts for substantial credit and would not have any power to borrow money.

Someone who has 'job hopped' over the years and has no real track record will be viewed by the lender differently than someone who shows a steady career development with one or two employers over a number of years.

Most lenders look for someone whose skills are always likely to be in demand in the labour market, who has a steady employment record and, therefore, reflects stability. A lender needs to have details of the borrower's previous employment history for, say, the last two years. Many lenders have adopted special lending schemes for professional people, whereby the income multiple may be higher than the norm to reflect the fact that the borrower's future is relatively more secure.