The following factors determine how much you can borrow on a mortgage to buy a house:
Most mortgage providers will be pleased to discuss how much you can borrow on a mortgage. The mortgage amount can vary considerably between providers and is usually calculated by using 'income multipliers'. Phrases such as '4 + 1' and '3.75 x joint' are commonly used. These are examples of income multipliers and simply mean that the provider is prepared to lend, say, four times the higher income plus the amount of the lower income (assuming, of course, that a couple is buying). A single person buying would not have a secondary income and, therefore, could borrow less on the same property than could a couple.
Example: Using the above examples of multipliers, the maximum loan available to a couple on salaries of ВЈ20,000 and ВЈ13,000 would be:
Using the '4 + 1' multiplier: ВЈ93,000
Using the '3.75 x joint' multiplier: ВЈ123,750. It is apparent from this what a difference the multiplier can have on the loan amount, and can go as high as 5 times sole income. (dependent on credit score, level of income and type of mortgage product taken) In some cases the lender may even consider lending at a higher income multiple if they feel the mortgage is affordable.
Income may take many forms, including: salary/wages; overtime that is guaranteed; overtime that is not guaranteed; commission; unearned income (for example, investment income, property rents); bonuses that are guaranteed; bonuses that are not guaranteed; part-time income.
Each lender decides what parts of the borrower's income can be taken into account when considering the income to be used in arriving at the multiplier.
Generally, if the income is guaranteed or can be proved to have been received regularly over, say, the last three years, the lender allows the full amount of income to be included in the multiplier. If some part of the income is not guaranteed, the lender will either not allow it at all, or only allow a proportion of it to be taken into account.
Most lenders require proof of a borrower's income. This can take the form of salary slips (for example, over the last six months), P6Os for the last two years or an income reference (this is a questionnaire sent to the borrower's employer, asking for the details of income and confirmation of the permanency of the position of the borrower).
An income reference requires a company stamp and the signature of someone in authority in the employing company. The lender looks for as much security as possible in order to prevent the borrower overstating his income and borrowing more than he can repay. Such proof of income also reassures the lender that the borrower is in secure employment.
The self-employed usually have to produce three years' audited accounts as verification of the income to be used by the lender in the income multiplier. Where a borrower does not have three years' accounts, an official letter from the borrower's accountant may be acceptable. These requirements differ from lender to lender. For a number of reasons, proof of income may not be readily available, and in those circumstances a self certification mortgage may be appropriate.
ll mortgage lenders need to ensure that each borrower can afford to repay the monthly instalments without being overstretched financially. If a borrower takes on too high a monthly commitment, the dangers are that there will be insufficient disposable income to maintain payments if interest rates increase and so push up the monthly cost of servicing the mortgage. The borrower could then run into arrears.
Ultimately, the borrower's inability to repay the mortgage may lead to repossession, resulting in considerable hardship for the borrower and additional costs and bad publicity for the lender. To avoid these dangers, the lender takes into account the prospective borrower's existing credit arrangements before assessing the amount of mortgage they are willing to lend. Existing credit includes the following:
- amounts outstanding on credit cards
- other unsecured hire purchase (HP)'agreements from finance houses
- unsecured bank overdrafts
- other mortgages on other properties
- tax bills yet to be paid (usually only relevant for the self-employed)
Example: A couple want to know their maximum borrowing capacity. The female's salary per annum is ВЈ19,000 and the male's salary is ВЈ9,500. They currently have a hire purchase loan for ВЈ3,100, costing ВЈ70.00 per month for the next four years, and an outstanding credit card amount of ВЈ350. They say that they usually clear the outstanding balance each month. Assuming a 'four plus one' multiplier, there are two main possibilities which most lenders consider when establishing the maximum borrowing capacity: The main method is to deduct the ongoing credit commitment from the main income before applying the income multiplier: ВЈ19,000 less ВЈ3100 = ВЈ15,900 x 4 =ВЈ63,600 + ВЈ9,500 = Total loan available of ВЈ73,100 (This is only one way that lenders use - there are others)
There is a difference in the loan amounts available, depending on the lender's criteria. Generally, a lender has to rely on the honesty of the borrower in disclosing all existing credit on the mortgage application form, although some aspects of credit can be checked through credit agencies. Very often, the borrower will have to submit bank statements, particularly if the lender feels that there is some doubt as to affordability of the mortgage repayment.
Amount of Deposit
When house prices are rising many lenders are happy to lend 100% of the value of the property as a mortgage, confident that the value of the property will increase and so produce equity (a value over and above the mortgage amount if the property were to be sold) and, therefore, security for their loan. If house prices are falling as they did during the late 1980s and early 1990s, mainstream lenders are unlikely to offer 100% mortgages and will restrict their lending to a maximum of 90% of the property value.
Generally this means that most borrowers have to find a deposit of at least 10% of the price/value of the house. Indeed, some lenders insist on a deposit of 15%, or more. Whilst this is not generally a problem for second time buyers who already have equity to transfer to their new purchase, it has meant that many first time buyers have to delay plans to buy or have to borrow the deposit from a third party, often from parents or by means of an unsecured loan.
The main benefits to the lender if the borrower has an equity stake in the property are as follows:
- The property is more likely to be looked after if the residents have a stake in it and, therefore, something to lose
- Putting down a deposit shows that the borrowers have a sense of commitment to the property and are people with the self-discipline to save money.
- If the property were to be repossessed, there would be an equity value available to pay the necessary bills in order to ensure that the lender does not lose out financially.
As far as borrowers are concerned, the main benefit of having an equity stake in their property is that their monthly outgoings will be less as they are having to borrow less and the indemnity guarantee premium will be less. Borrowers will also have a much wider choice of lenders willing to consider a mortgage application more favourably if a reasonable deposit is available.
As well as checking income, most lenders carry out independent checks to verify the borrower's 'creditworthiness' thus reducing the incidence of fraudulent applications.
Existing mortgage reference
Where the borrower has an existing mortgage, the new lender can ask for a reference to ensure that there are no arrears and that the borrower has paid instalments in accordance with the conditions of the loan. If there are any arrears, the lender may reject the loan application outright or continue to consider the application, depending on whether the borrower has disclosed the arrears and provided an appropriate explanation.