Tuesday, May 30, 2023

How Much Can I Borrow For A Mortgage?

There are two questions that we are asked almost daily. “Can I get a mortgage in my situation?” and “How much can I borrow?”. In this article, we’ll explore the latter.

historical law

There was very little technological intervention in the mortgage application process in the 80’s and 90’s. You will make an appointment with your local building society manager, and they will organize an interview with you.

More often than not, they will encourage you to bank with them until you prove yourself to be credit worthy. After this period, you would be provided with the equivalent of an agreement in principle by the manager, including advice on how much they were prepared to lend you.

Some see this as a highly individual process and common sense approach. However, at times this led to inconsistent decision making as the lending manual was left up to interpretation by the manager. In other words, you could approach the same building society in a different town or city and get a different result.

With a view to rationalize this and cut costs, lenders turned to automated affordability calculations. “Limits” were put in place so that they can’t lend you more than 3 or 4 times your household income.

As the 2000s progressed, lenders were becoming increasingly liberal with the amount they lend. Some lenders have even started offering self-certified mortgages, where no background check will be done.

Then, in 2008, the market crashed. The next few years saw lenders close the hatch and create an extremely cautious, lending environment. This made it difficult for many to climb the wealth ladder.

outlook nowadays

Following the marker’s recovery, the regulator launched the Mortgage Market Review (MMR) in 2014. It was a new set of guidelines for lenders to follow, which saw the end of old-style income multipliers that did not account for household spending.

Before 2014, two applicants with the same income could borrow roughly the same amount as each other. This was regardless of how much they spent each month. But then we saw the introduction of the new affordability model, which tracked how applicants manage their money on a monthly basis.

There still exists a “cap,” with most lenders going no higher than 4.75 times your annual income. However, they consider your spending habits before deciding how much to lend now. For example, if you have high childcare costs, lots of credit commitments, and a student loan, they will offer you less than your friend who has no expenses.

Here at ManchesterMoneyMan.com, we are constantly surprised by the huge variations from lender to lender. Some lenders seem to penalize low earners (perhaps they are not looking for that type of applicant). Others view pension contributions as a fixed expense so often lend less to individuals who are paying more into their pension.

This really is a horse for courses and you will need a local mortgage broker on your side if you need to maximize your borrowing capacity to buy a home. Someone who can research the market on your behalf to see if anyone will lend you the amount you need for your unique circumstances.

How much can I borrow?

If you are wondering “How much can I borrow?” And in order to get a mortgage, you should sit down with an advisor and work out your finances together to make sure the repayments are something you feel comfortable with.

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