Mortgage lenders have very complex formulas when deciding affordability. We happen to know these formula and are ready to share.
Each mortgage lender is different and will have their own set formula for deciding affordability. The founder of findahood happens to have worked with each lender and so can give a unique insight to how their decisions are made.
Mortgage lenders will largely base the amount you can borrow on a multiple of your individual income or you and your partners income if applying for a mortgage together. A lot of lenders will lend up to 5 times your income, but what sort of income? Income can be defined in many ways so lets be specific.
If you are employed your income will be your annual pre-tax income. Each lender will view overtime and bonuses with varying degrees of respect, which means some lenders will add your bonuses to your income, some will add 50% of them and some may not include them at all.
Self employed applicants will have a harder time as they will need to provide proof of at least 2 years of accounts to most lenders showing a healthy operating profit. This is what will then be used as the figure to multiply by 5. Each lender is different however, and they may use last year's profit or the average over the last few years.
Any income from investments, i.e. dividends, will be added to any employed income or self employed profit. Again each lender will treat these with varying levels of respect so they may include 100% of the dividends, 50% or 0%. The same is true for other income such as child care payments or payments from a county court judgement. So it all adds up!
To further complicate the maths there will be deductions too. These can come in the form of outstanding credit card debts, secured and unsecured personal loans, hire for purchase payments or mortgage repayments on other houses.
Similar to the additional incomes, each lender will take these outgoings with a varying pinch of salt when subtracting them from your income.
Some good news for most. Student loans are not considered when discussing mortgage applications. Oddly, it is different from personal loans in that mortgage lenders just don't seem to give it a thought despite it potentially detracting hundreds from your salary!
Once all the calculations have been done above to calculate how much you can borrow, you will then be expected to jump the LTV hurdle. The loan to value is the percentage the loan is of the value, for example a £90,000 mortgage on a house with a value of £100,000 makes a 90% Loan to Value (LTV).
Lenders used to have a range of LTVs that applied to a multitude of applicant circumstances but post 2007 they usually go in for a blanket LTV for all their mortgage products and simply give better rates to applicants with lower LTVs.
With the help to buy scheme underway, lenders are confident to lend mortgages with higher LTVs such as 95%, meaning as well as the income multipliers listed above you will need to have at least a 5% deposit.
We discussed two parts to this question. The first was affordability, which means you should multiply your income (minus any credit card and loan repayments) by about 5 to find the amount you can borrow. The second was LTV which means you will need to have at least a 5% deposit in savings, although we recommend having as large a deposit as possible since it will give you access to more competitive rates, so please read our guide to saving a deposit.