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 will explore the latter.
historical rules
In the 1980s and 1990s, there was little technological intervention in the mortgage application process. You would make an appointment with the manager of your local mortgage company, and they would conduct an interview with you.
Most of the time, they will encourage you to bank with them until you prove yourself creditworthy. After this period, the trustee would give you the equivalent of an Agreement in Principle, including advice on how much he was willing to lend you.
Some people see this as a highly personalized process and a common sense approach. However, it sometimes led to inconsistent decision-making as the loan manual was left for the manager to interpret. In other words, you could have approached the same Building Society in a different town or city and gotten a different result.
In order to make it fairer and lower costs, lenders switched to automated affordability calculations. “Limits” were applied so that they would not lend you more than, say, 3 or 4 times your household income.
As the 2000s progressed, lenders became more and more generous with the amount they would lend. Some lenders even began offering self-certified mortgages where no background checks would be done.
Then, in 2008, the market crashed. The next two years saw lenders batten down the hatches and created an extremely cautious lending environment. This made it difficult for many people to climb the property’s ladder.
current focus
Following the marker’s recovery, the regulator launched the Mortgage Market Review (MMR) in 2014. This was a new set of guidelines for lenders to adhere to, spelling the end of old-style income multipliers that didn’t household expenses were taken into account.
Before 2014, two applicants with the same income could borrow about the same amount as the other. This was regardless of how much they spent each month. But then we saw the introduction of new affordability models, exploring how applicants managed their money on a monthly basis.
There is still a “cap” with most lenders not to exceed 4.75 times your annual income. However, they now consider their spending on clothes before deciding how much to end. For example, if you have high child care costs, lots of credit commitments, and a student loan, you’ll be offered less than your friend who doesn’t have any of those expenses.
Here at ManchesterMoneyMan.com, we are constantly amazed at the wide variations from lender to lender. Some lenders seem to penalize people with low incomes (they may not be looking for that type of applicant). Others see pension contributions as a fixed expense, so they would often lend less to people who are paying more for their pension.
They really are course horses and if you need to maximize your borrowing capacity to get the home you need to buy then you will need a local mortgage broker on your side. Someone who can research the market on your behalf to see if someone will lend you the amount you need given your unique circumstances.
How much can I borrow?
If you are wondering “How much can I borrow?” and want to get a mortgage, you should sit down with an advisor and work through your finances together to make sure the payments are comfortable for you.