How do mortgage lenders calculate how much I can borrow?
Noel McLaughlin, of Butterfield Bank, replies:
ONE of the first questions people ask when looking to buy a property is how much they can borrow. They want to understand what these calculations are based on.
Lending ultimately boils down to affordability. Lenders need to ensure that whatever a person borrows can be repaid, while also accounting for risk factors such as a change in financial circumstances.
Most lenders determine this through a loan-to-income ratio, otherwise known as a salary multiple. Each lender will have a different formula, but this is typically four-to-five times your salary.
So, if a couple jointly earn £60,000, they could borrow approximately £240,000-£300,000.
An additional means of determining borrowing potential is by using a loan-to-value ratio. This is the loan amount relative to the value of the property, and affects the deposit you’ll need. The higher the LTV rate, the more you are borrowing against the value of the property; a £500,000 property with a £450,000 mortgage is a 90% LTV.
Lenders also consider your credit score, typical incomings and outgoings and how long you will take to pay the mortgage off.
While these are the typical considerations, there are mortgage products on the market and providers, like Butterfield, that take a more bespoke approach; accounting for lifestyle factors outside the bounds of standard parameters, such as bonuses or investments.
