HOW MUCH CAN YOU BORROW ON A MORTGAGE?

LETS TRY TO SIMPLIFY THE SUBJECT!

One of the most common questions I get asked is "how much can I borrow?". It may be that a young couple want to know how much they can borrow for a first time purchase, or a client interested in property investment wants to know how much extra they can borrow to fund a buy to let property - or a client may want to extend their mortgage for home improvements. More common lately has been whether Covid has impacted how much you can borrow

Most clients I speak to have no idea what their borrowing capacity is or how lenders will assess them. In this article I wanted to lift some of the fog surrounding the subject and give you a better idea of how you can calculate what you can borrow and what factors will affect this.

Covid has complicated things - so I will be covering some of the factors associated with lending and the pandemic in this article!

The first thing to say is that all lenders are different - they all assess things in their own ways according to their own risk profiles and parameters. One lender may lend 3 x joint income, another may lend 6 x, one lender may lower borrowing levels if you have dependent children, others may not. So it is a minefield, and it can be complex, but what I want to do here is give you some general rules of thumb, and some worked examples of clients I have helped recently.

GENERAL RULE OF THUMB!

To give you a general guide you will be able to borrow typically between 4.5 to 5 x your income. That isn't set in stone but the majority of clients fit into the bracket where this is achievable. Some lenders will go up to 5.5 x income or more! but this depends heavily on overall affordability, and rates will tend to be higher as a result.

So taking a basic example, a couple earning ￡30,000 each would have a combined income of ￡60,000. Assuming no debt, children or other commitments we can fairly comfortably assume that they could borrow ￡300,000. Assuming they were putting down a 10% deposit they could buy a house up to a value of just over ￡330,000.

REAL LIFE EXAMPLES

Lets look at a some deals I did recently for 3 sets of different clients.

So we have established that you can borrow generally 4.5 to 5 x your income or joint income. What are the factors that will impact and erode how much you can borrow?

Key Detrimental Factors

• Car lease agreements - these often run for a couple of years at a fairly low payment HOWEVER the total cost of the car can often show on your credit file making it look like you have an enormous credit balance
• Credit cards - large balances are frowned upon and not only are the costs taken into account for mortgage affordability calculations they can often paint a picture to a lender that you cant manage on your income.
• Loans - similar to the credit card reasons above - but also because you have a set, larger payment monthly than the comparable payment on a credit card - again affecting affordability
• Overtime, commission or bonus payments that are irregular or variable - lenders tend to be cautious about income that is variable or uncertain - anything that is not guaranteed could be discounted as income or downgraded (say to 65% of total) unless there is a strong track record/evidence.
• Commitments such as school fees or similar will be taken into account for affordability purposes

**COVID NOTES**

Bounce-back Loans - lenders do frown on these and tend to take them as evidence that you can't support your business and yourself. Harsh but a reality at present!

Bonus & commission - Expect lenders to look very closely at these and whether they are sustainable and have remained consistent

Furlough - a reality for thousands, and lenders are very cautious here. Most will want to see furlough ended or an end in sight to consider your income.

Self employed? - again expect lenders to look at the impact of Covid on income and also business sustainability. they will definitely want to see your income returning/rebounding before they lend!

These factors can all have an impact on how much you can borrow but there is no set formula as to how much - all lenders will assess things differently.

WAYS TO INCREASE WHAT YOU CAN BORROW

• Consider extending the term of your mortgage. lenders tend to consider loans as more affordable if they are taken over longer periods
• Longer term fixed rates - If you opt, for example for a 5yr fix or longer, lenders may extend lending a bit as they deem you to have a more stable payment for a longer period with less risk.
• Try to reduce any unsecured debts such as credit cards or switch any loans or finance with hefty payments to facilities where monthly committed payments are lower. the lower your committed expenditure, the more you can borrow!

SUMMARISING

For most clients with minimal debt and a good credit history you are pretty safe borrowing up to 5 x income with a major high street lender with great rates.

If you have debts, variable income, children or dependent adults or other commitments this formula will be affected.

To get an accurate picture of how much you can borrow please feel free to give me a call or drop me a message!

c.beesley@thefinancialconsultancy.com

07740 284270 or 01322 553282