One of the most common question first time buyers and home movers have asked us are “How much can I borrow?”. Here I will give you a background of affordability assessments and how they apply post-2014.
Before the days of credit scoring, mortgages were manually assessed by your local Building Society Manager. Lenders moved towards more uniform income assessments to provide a consistent approach in the 1990’s.
Maximum lending “caps” were introduced so that customers couldn’t borrow more than, say 3 or 4 times their annual income.
Approaching the time of the credit crunch in the 2000’s, these income multipliers became more and more “generous”. Indeed some lenders allowed customers to “self-certify” their incomes with no background checks such as payslips necessary!
It all went wrong, and post-financial crisis lenders were over-corrected, and it became more challenging to obtain a mortgage.
When the market eventually recovered the Mortgage Market Review came about. This brought a new set of guidelines for lenders to adhere to. Gone went the old income multiplier method and in came new, more sophisticated affordability calculators.
These new calculators looked deeper into an applicant’s spending habits and net disposable income.
Bank statements began to be scrutinised more closely to ensure unaffordable mortgages were not granted as they had been before. For example, things like childcare were now taken into account.
Lenders do compete with each other on price but to avoid a race to the bottom, they compete on lending criteria also. As such, it’s amazing the variances from Lender to Lender in terms of maximum borrowing capacity.
Different lenders are looking for different niches of clients so just because one Lender says they won’t lend you enough by no means is it the end of the road.
Some lenders will take into account state benefits such as tax credits for a mortgage. Others are more generous for self-employed mortgages. Extending the term of the mortgage to the maximum allowable also increases the amount they will lend.
As the 2000’s progressed, lenders were becoming more and more generous in how much they would lend. Some lenders offering self-certified mortgages where no background checks would be carried out as regards how much an applicant actually was earning! Where did it all go wrong?!
Well, it did, the market crashed, and to all intents and purposes, 2008-2010 were challenging years for mortgage applicants trying to get on the property ladder. Because lenders battened down the hatches and created a very cautious (over-corrected) lending environment.
The market recovered and in 2014 the regulator launched the Mortgage Market Review (MMR), a new set of guidelines for lenders to adhere to.
Gone were the old-style income multipliers which took little account of household expenditure (before 2014 two applicants earning the same could borrow roughly the same as each other irrespective of how much they spent each month).
Then came new affordability models taking a much more forensic view of how mortgage applicants managed their money on a monthly basis.
There is still a “cap” in place (most lenders will not go past 4.75 times your annual income), but your spending habits are also analysed.
For example, if you have high childcare costs, lots of credit commitments and a student loan you will be offered less than your work colleague who doesn’t have any of that expenditure.
We are still constantly surprised by the large variances lender to lender in how much (or little) they will lend. Some lenders seem to penalise low-earners (perhaps they are not looking for that type of applicant).
Some take pension contributions as a fixed outgoing so would often lend, say a public sector worker with a big pension deduction less than a private sector and so on.
It really is horses for courses. If you need to maximise your borrowing capacity to obtain the home you need to buy, you’ll definitely need a mortgage broker on your side.
With the help of a mortgage broker, they can research the market on your behalf to see if anyone will lend you the amount you need.
Before you take out a mortgage, you should sit down with an advisor and work out your finances together to ensure that the repayments feel comfortable to you.