Why Mortgage Affordability Matters

Mortgage lenders are beginning to move away from income multiples when calculating how much you can borrow. It's still affordability that counts though.

The Council of Mortgage Lenders recently announced that the average first-time buyer was now borrowing 3.24 times their income when getting a mortgage - the highest income multiple level ever recorded. But being offered just over three times your gross salary isn't much use if you live in an area where house prices are rather higher than that.

Which is why more lenders are beginning to change their criteria when considering how much you can borrow. Affordability is the key word rather than straightforward income multiples - in other words, ability to repay.

According to the independent research company, Moneyfacts, five of the top 10 mortgage lenders now use 'ability to repay' in preference to income multiples in determining the amount they are prepared to lend. They are Alliance & Leicester, Halifax, HSBC, Nationwide and Royal Bank of Scotland.

For example, someone earning £25,000 a year would, in usual circumstances, borrow £81,000 using the average 3.24 income multiple. At a mortgage rate of, say, 5% it'll cost £474 a month - nearly a third of their monthly income - over a 25-year term. But if lenders calculate a debt to income ratio, which as a rule of thumb should not exceed 40%, then our homebuyer could afford a £105,000 mortgage with monthly payments of around £614. This is assuming they have no other debt, of course.

Spread the payments over a 30-year term and he could afford a mortgage of £115,000 for the same monthly outlay, again assuming they have no other debts. And they could overpay later on when they're earning more to shorten the term and lessen the interest hit.

That's not to say that lenders still working on income multiples haven't refined their criteria. For example, those on larger salaries, with a bigger deposit or in a professional occupation may be offered higher multiples.

In all cases though, just because a lender thinks you can afford a bigger mortgage doesn't mean you should put yourself in a position where you might overstretch yourself. Remember, not only can interest rates go up as well as down but house prices can go down as well as up.

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