Loan Amount
There are several factors which mortgage lenders will take into account in order to determine how much money you can borrow. Mortgage providers will assess your income and spending habits, your credit rating and your personal circumstances, including your marital status.
As of 2004, most mortgage lenders are regulated by the Financial Services Authority (FSA). According to FSA rules, your provider must ensure that they only lend you what they consider you are able to reasonably repay. Generally, mortgage lenders will allow you to borrow up to three and a half times your annual salary. You may be able to borrow a greater amount, but in return you are usually required to pay a higher interest rate. If you are buying a house with your spouse, partner, or someone else (see Guaranteed & Joint Mortgages), both incomes are taken into account; some lenders offer up to three and a half times your combined income, whilst others add the value of your partner's income to the amount you would be able to borrow alone. For example, if your annual salary is £30,000 and your partner's is £15,000, you may be able to borrow up to £120,000.
Although some mortgage providers will lend more than three times your income, many properties in the UK cost considerably more than this. As a result, some mortgage lenders will allow you to borrow more; you should carefully consider whether you can afford to repay the debt: how would the monthly repayment affect your disposable income? Consider how much of your monthly income you can afford to spend on mortgage repayments, and whether or not you could still cover the monthly payments if your income suddenly changed: for example, if you are made redundant, or become ill and cannot work.
Affordability Assessment
In the past, a mortgage provider would grant you a loan based on your income alone. However, it is now more common for your lender to carry out a full 'affordability assessment' before they decide how much you can borrow. This assessment helps the lender develop a more accurate picture of your financial situation and should ensure that you are not lent too much, nor unfairly restricted to a smaller amount. Aspects taken into consideration include:
- your total income, including any bonuses, commission, benefits and other income, such as overtime wages or dividend payments
- your commitment to any existing debts, such as credit cards and personal loans
- your living expenses, including household bills and dependants, such as young children
- your educational/professional status and likely future income
Although bonuses, commission, overtime wages and other income is taken into consideration, they are all treated as 'unguaranteed', and are usually reduced in value to reflect this; most mortgage providers will halve the value of any unguaranteed income when calculating the loan amount.
If you already owe money on other loans (including personal loans, car loans and student loans), or have other financial commitments, such as credit cards or a large overdraft, your mortgage lender will take these into account and offer you a lower loan amount. Do not be tempted to conceal these debts in an attempt to secure a larger loan. You risk committing fraud and losing your home if you cannot afford the repayments.
In addition, you should attempt to consider the additional costs of buying a property before deciding how much you could reasonably repay. These costs include Stamp Duty Land Tax and necessary property alterations or additional purchases. For further details see Additional Costs.
