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How Much Am I Able To Borrow?

Feb 5, 2008
When arranging a mortgage you will often come across the statement affordability. A lot of people do not really understand what this term really means. Yes of course it means can you afford the mortgage but more importantly it means can you afford the mortgage in the mortgage companies' eyes.

Affordability can be a very subjective thing, what one person feels is affordable another may not. This in turn can present a problem for lenders in so much as how they assess one persons ability to afford a mortgage against someone else's ability to afford the same loan.

Obviously they can't distinguish from one person to another so they create their own criteria and apply that to each applicant. With this in mind, do not be discouraged. Shop around, for one criteria may not accept you where another one will.

Some lenders say they will lend you 3 times your salary minus any other financial commitments. Therefore if, for example, you earn 30,000 per year and each month you pay a car loan of 300. By multiplying that 300 by 12, you can see that you pay out 3600 per year for your car. Take this off 30,000 and you are left with 26,400 which your mortgage lender will consider as your annual worth. According to their lending criteria, they will therefore lend you this amount multiplied by 3 which will give you a mortgage of 79,200.

Don't worry if your income is this or less as all lenders are very different. Three times your income is a very conservative estimate nowadays. Most lenders will lend 4 times the amount and over and some will go to over 5 depending on their criteria and your circumstances. In some cases the lender will ignore current outgoings such as car loans and credit cards, unlike the case above, so it is worth while taking the time and attention to look for the lender with the criteria best suited to your individual circumstances. Shop around.

There are a few lenders that do not work on the multiple times income principle at all. These lenders work affordability in a completely different way. These lenders may use a system of allowing a certain percentage of your income for borrowing per month. This works quite simply say your income is 20,000 and they allow you to spend say 40% of your income on debt but you already have a car loan costing 2400 per annum this is how it would work:- 20,000 times 40% equals 8,000 less the car loan of 2,400 leaving you with 5,600. This then means that these types of lenders will allow you to borrow from them as long as the new mortgage does not cost you more than 5,600 a year of 460 per month.

Whilst no one can really tell how much a person can really afford these types of calculations are laid down to ensure there is a certain degree of responsible lending taking place. All lenders have to demonstrate to their regulators that they have not lent money irresponsibly.

Also it should be taken into acount that although you may feel that you can afford to borrow a certain amount in your present circumstances, factors such as future fluctuations in interest rates may not see you financially as secure later on down the line. Not only are these policies protecting the lenders, they could invariably be protecting yourself as well.

So be realisitic about your affordability when applying for a mortgage. Try to factor in a few percent increase to allow for the future. A good safety tip, if your mortgage adviser hasn't already done so, is to recalculate the mortgage but factor in an increase of 3%. If the repayments still appear affordable, you should be safe to continue.
About the Author
Mortgage Advice from specialist Independent Mortgage Advisors help information and no obligation mortgage calculators please visit MortgageRoute.co.uk
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