How Is Mortgage Affordability Calculated?

What Are Mortgage Affordability Checks?

When applying for a mortgage, you must meet certain mortgage affordability criteria before a loan can be granted to you. Of course you must meet certain rules such as having a good credit profile, purchasing the right type of property, having the right type of employment contract etc. However, the exact amount that you are eligible for is determined by your overall income and outgoings.

At decision in principle stage of the mortgage process where you credit is checked by the bank, the lender will go through some questions about your income and outgoings status. They will ask questions about how much you earn and what your money is currently spent on. From this, they will then work out, in their opinion, how much mortgage you can afford to have as a monthly debt.

UK Mortgage Affordability Rules

Different lenders have different affordability criteria and some lenders are more generous with their lending than others. This is mainly down to the parameters that their risk departments set and also how willing the lender is for new business. On a residential mortgage, generally the mortgage affordability rule of thumb is that most lenders will be willing to lend between 4.49X and 5.5X income depending on these rules.

How To Get A Mortgage Affordability Test

The quickest and easiest way to find out how to work out mortgage affordability is by speaking to a mortgage advisor. You might be tempted to go direct to a bank to do this, but that is really not a great idea. Especially if you are wanting to see the maximum possible mortgage that you can get. A bank will have their own affordability rules and won’t generally budge on these rules.

A mortgage advisor such as Oportfolio will have access to lots of different mortgage lenders and will be familiar with all of their criteria and how they calculate affordability. When you speak to an advisor they will search the market to find you the most generous lender for your circumstances. All you need to do is call or email the advisor and they can set up a fee free meeting with you either face to face, over the phone or via zoom and they will be able to go through the affordability process which can be done is less than 10 minutes in most cases.

How Providers Work Out Mortgage Affordability

The question of “How do mortgage lenders work out affordability?” and how to calculate mortgage affordability is a bit of a tricky one as we have already said that different lenders have different criteria. Each lender has their own stance on how to calculate mortgage affordability based on their own risk departments and their opinion on the market at the time. Below are a few of the major UK mortgage lenders, how they work out how much they want to lend you and generally mortgage affordability rules.

How Santander Works Out Mortgage Affordability

Santander mortgage affordability is considered one of the more conservative lenders when it comes to the amount they are willing to lend. This does not mean that Santander is not willing to lend, it means that they are more selective on how much they lend and what they will do to assess this. With Santander, they will often need you to have at least 10% deposit, but the more deposit you can contribute, the better.

They will consider lending to both employed and self-employed people and will take 100% of basic employed salaries for affordability. For people who earn bonuses, commission, or overtime, Santander will need you to have received the income regularly i.e. every month, every quarter, every year. They will need to know the last three regular bonus/commission/overtime figure and will calculate an average. For example, if you earned £1,000 in April, £900 in May and £2,000 in June, Santander will use £1,300 as the average figure. They will also only accept a percentage of this secondary income figure for affordability. Around 70% at the time of writing this blog.

For self employed people, whether director of a limited company or a sole trader, Santander will need to know your income figures for the last two years and will work off an average. So, if you are a limited company director, they will need to know your salary and dividends for the last two years and if you are a sole trader they will need to know your net profit figure for the last two years. So, for example if you earned £80,000 one year and £70,000 the year previously, Santander will calculate your income as £75,000 a year. An average of the two.

Where Santander is different to most other lenders is that with self employed mortgage affordability, they can request something called an accountant’s certificate that your accountant can fill out for you which will show the income you have received for the last two years and also what they expect your income to be for the coming year too which can be used for affordability in some cases.

When it comes to outstanding credit commitments, all must be included on the affordability calculations, even if they are being cleared prior to completion. In the past, this has meant that a lot of people are being offered lower mortgage amounts because of this. Things like outstanding credit card balances or small loans will make an impact.

Nationwide Mortgage Affordability

Nationwide affordability has a similar stance to Santander when it comes to affordability but are generally more black and white with their lending decisions. By this we mean that like Santander, Nationwide will accept 100% of basic salaries for employed roles as long as you have a permanent contract or have at least 12 months history in the line of work if you are temporarily employed. For overtime/bonuses/commission payments, they will ask for 3 months payslips to show the income is regular and will take an average however, if the latest payslip shows £0, this will invalidate all of the extra income and Nationwide will not be able to accept any of it is income.

For self-employed people Nationwide will take an average of the last 2 year’s income figures however they will only accept official income documents (accounts/tax documents) as proof of income and will not accept any form of projections or accountant’s certificates like Santander.

For Nationwide, if you are clearing credit commitments prior to mortgage application i.e. credit card balances/loans, Nationwide will disregard these and you will not need to put them into the affordability checks.

Halifax Works Out Mortgage Affordability

Halifax is one of the more straightforward affordability assessments and can often be very generous with how much they are willing to lend. For employed people they will take 100% of basic salaries and will take a generous look on regular bonus and income as long as it shows on the last three months payslips. If your latest bonus/overtime/commission figure is lower than the others then this figure will need to be used for affordability.

For self employed people, generally Halifax will use the last 2-year’s income figures and make an average, however if you have been trading for less than 2 years, this can also be acceptable as long as you have a minimum of 1-year trading. They will also only accept official documents as proof of this income.

If you have credit commitments that will be cleared prior to application, these can be left off the affordability checks with Halifax.

Read our article: Halifax Mortgage Affordability Changes.

Barclays Affordability Mortgage Checks

Barclays mortgage affordability will allow 100% of basic employed income and will only need one month’s payslip for proof, however they will only take 50% of any bonus/commission/overtime into account for affordability if you are just going off of payslips. If you want 100% of any extra income to be taken into account, you must provide that last three months payslips and the last years full p60. If the values of the income vary greatly, an average will be used for affordability.

How NatWest Works Out Mortgage Affordability

NatWest mortgage affordability focuses more on exact figures and consistency when checking income. NatWest generally favour basic guaranteed income so people with larger base salaries that are an exact and contracted amount will often have higher lending potential. Where any income couch as bonuses are received, NatWest will be very thorough on what they will and will not accept, often asking for 3 months payslips and a P60. Your extra income will need to have been received every month and for a minimum period too. If the income fluctuates they will take an average of the three months.

For things like credit commitments, NatWest will need any outstanding balances and monthly payments that will continue post application to be inputted in the affordability. Anything being cleared can be left out. Because of the thoroughness of NatWest affordability and their strict acceptable/non acceptable income criteria, the maximum mortgage amount offered by NatWest is often higher than other lenders.

Accord Mortgages are perhaps a less well known lender, but a very popular one for borrowers looking to get more bang for their buck. Recently Accord have increased their maximum mortgage borrowing income multiple to 5.5X income from the usual 4.5X income. This means that people wanting to borrow the higher loan mortgages can potentially do so with Accord. For any bonuses and overtime being used in the affordability checks, Accord will accept 60% of this income and will go off an average of the last three months payslips. Where basic salary is the only income being used, they will only need 1 month payslip and 1 month bank statements as evidence.

For self-employed people Accord will actually only need to write to your accountant and ask them what your income is. In most cases you will not need to provide any specific documents to prove your self employed-income. However, if you don’t have an accountant you will need to provide 2 years tax documents yourself.

How Is The Cost Of Living Crisis Impacting Mortgage Affordability?

Anyone who hasn’t been living under a rock for the last 8 months or more will know that the cost of living in the UK has risen significantly. Food, petrol, energy prices and more have all increased in price recently and the term ‘cost of living crisis’ has been thrown around like it’s going out of fashion. As mortgage brokers, it’s only right for us to address how the cost of living increase has impacted mortgage affordability for borrowers. Relying heavily on changes implemented by the Bank of England, mortgage affordability with lenders has gone through some significant changes. So let’s have a look at some of the major changes that have impacted affordability.

Since the economy has started struggling and the cost of living has gone up, many mortgage lenders have started to get more cautious with who they are lending to and how much. A lot of mortgage lenders have started changing the way they assess income and outgoings for people and have discouraged borrowing at higher LTV levels. If you have had a mortgage declined on affordability grounds, here are some reasons why it might have happened:

    1. Restricting and reducing income multiples

Before the economic crisis, most mortgage lenders would lend between 4.5 and 5.5 times annual income for a borrower with some lenders going up to 6 times in some circumstances. So, someone earning £50,000 a year without any credit commitments and good credit score could potentially borrow a loan of around £275,000 to £300,000. However, in recent months, lenders have frequently capped their affordability at 4.49 times with higher income multiple borrowing becoming increasingly rare. This is to safeguard lenders from lending too much money to people who may struggle to pay back the loan if they get into difficulties due to the financial crisis.

    2. Increasing monthly commitments for everyone

Before the financial difficulties, most lenders would consider credit commitments like loans and credit card payments in their monthly credit commitment assessment and it was only at mortgage application stage that lenders would ask for a more in-depth breakdown of things like utilities bills, food bills, petrol spending etc. However, a lot of lenders have started to automatically apply inflated monthly commitments to their affordability assessments due to the rise in the cost of living. So for example, it is not unheard of for lenders to automatically apply petrol or travel costs to mortgage affordability assessments despite there being no confirmation about how much a borrower actually pays per month. This again is a move to safeguard the lender from lending a mortgage to a borrower who can’t afford to keep up with their monthly mortgage payments, no matter how true it is or isn’t.

    3. Mortgage rate stress tests

Mortgage lenders will often apply things called stress tests to affordability checks. Mortgage lenders have always had these in place when they calculate mortgage affordability, to make sure that if a borrower’s rate were to increase, that they could still afford the monthly payment. Before the economic crisis, this was set at around 5%. Meaning that if someone wanted to secure a mortgage at 2.5% interest, they would often need to still be able to afford the monthly payment at 5% in order to be considered for a loan.

If they couldn’t afford that, then the loan offered would be reduced to a more manageable level. In recent months, a lot of lenders have increased their mortgage rate stress test to reflect increasing mortgage rates which are now over 6% on average. Some lenders have increased their stress test to as much as 8% meaning that the average borrower who previously only needed to prove that they could afford a mortgage at 5% can now afford it at 8%. A real life example of this is one of our clients who was originally offered £309,000 as a maximum mortgage. A week later, the lender increased their mortgage stress test and now the maximum loan they can afford is now £145,000.

    4. Favouring larger deposit

This has generally always been the case with mortgage lenders, the larger deposit contribution you can make, the more generous they will be with lending and the more competitive the rates they will offer. This is because the risk factor of their lending is significantly reduced if you have a larger stake in the property. Often lender’s 75, 70, 65, 60, 50% or lower LTV products have much cheaper rates than the higher 90, 95% products. This has continued since the economic crisis with lots of lenders completely dropping out of the 90 and 95% market or increasing the rates for these LTV’s significantly.

Are Any Lenders Axing Mortgage Affordability Rules?

It is quite a strange time for mortgage lending now and lenders are constantly making changes to their policies. When it comes to axing of affordability rules, mortgage lenders tend to make changes and allowances rather than completely getting rid of rules. In recent news a mortgage affordability stress test that has been in place since 2014 to try and ensure responsible lending is set to be scrapped amidst economic changes being announced by the Bank of England.

According to the Bank of England and the Financial Policy Committee, the stress test which requires lenders to assess a borrower’s future ability to repay a mortgage will be scrapped. This test is normally calculated by seeing if a borrower would be able to repay a mortgage if the rate was three per cent above a lender’s standard variable rate. An SVR is the interest rate that your mortgage ‘reverts’ to after your fixed rate mortgage period comes to an end.

According to financial information company Moneyfacts, the average SVR has reached a 13-year high of 4.91 per cent, following a rise of 0.51 per cent since December 2021. As most mortgage customers choose to secure their mortgages on fixed rates for 2, 5, or more years, this stress test measure has always been considered unnecessary and by scrapping this, arguably this will stop alienating some new home buyers and first time buyers from the property market however some think that this will just pave the way for a return to irresponsible lending like the lending we saw prior to the 2007-8 economic crisis.

According to the Bank of England and The Financial Policy Committee, the loan to income limit, the other recommendation which was brought in at the same time will remain, putting a restriction on how many mortgages a lender can issue at 4.5 times income or greater. Lenders can only offer a certain number of loans over 4.5 times annual income, but average house prices are almost 9x the average annual income and are continuing to rise as demand grows.

How Is Mortgage Affordability Calculated For 100% Mortgages?

Skipton Building Society announced recently that they would be the first lender to start offering a 100% mortgage product to first-time buyers in the UK. This is a major change to UK mortgage lending and could help thousands of people struggling with affordability rules, mortgage borrowing amounts and saving enough deposit to satisfy lenders. Here is a quick guide on working out mortgage affordability for 100% mortgages with Skipton.

In pretty much the same way as any other mortgages, affordability checks for Skipton 100% loans will lend you around 4.49X income. if you have any major credit commitments like loans, hire purchase, credit cards outstanding, these will be factored into the checks and will most likely reduce the figure they are willing to lend. With these types of mortgages, Skipton will also check that you have been a tenant paying monthly rent and all household bills without any missed or late payments, for at least 12 months.

From these rental costs, the society will work out an average of the last 6 months. E.g. Your rent may be £800 a month consistently. For the past 6 months your bills may have cost you £190 on average per month, which means that on average your monthly rental costs would be £990 a month. Skipton say that your new 100% mortgage payment must be equal to or less than that average figure (£990).

Speak To a Mortgage Advisor To Calculate Mortgage Affordability

If you are thinking of getting a mortgage but aren’t sure about your affordability, give our team of advisors and mortgage experts at Oportfolio a call today. We can guide you through the entire affordability process and help you find out exactly how much you can borrow. Give us a call today and get a free quick and easy affordability check.