The question that I am asked almost daily as a mortgage broker is "how much can I lend" and the easiest answer is… I don’t know until we have our first meeting.
There is a general rule that you can multiply your annual salary by 4.5 and this rule is used very loosely by many mortgage lenders. There are some out there who will multiply by more, and this can be upto 6x your annual salary! Whilst this sounds appealing to most people on the search for a mortgage, there are multiple factors that will affect the amount. These come down to:
Credit utilisation – this is the amount of credit you are using against the amount you have available
High credit usage – whether you are using a lot of credit as the monthly repayments then forms a large portion of your disposable income expenditure, this can sometimes be referred to as your loan-to-income (LTI) ratio
Monthly committed expenditure – how much you spend each month on items or subscriptions e.g. gym memberships, mobile phones
Deposit – how much deposit you are willing/have available to put down. This is sometimes referred to as your loan-to-value (LTV)
Adverse payment history – any missed payments, defaults, CCJs etc will all influence whether a mortgage lender will be happy to proceed with an application and if so, it may be that they will lower the amount available to you or ask for a higher deposit.
No credit footprint – whilst having adverse payment history on your credit file is seen as bad, not having any credit or low credit can also have an adverse effect on your mortgage application.
So now you can see why asking the aged old question “how much can I lend” is not a simple one. To put yourself in the best position to apply for a mortgage there are some things you can do to help yourself and in turn your application.
Pay off credit commitments on time each month. Even just one missed payment could put you on the list for having to go to a specialist lender.
Keep commitments to a minimum. Its easy once you have your first well paid job to go out and get a shiny new car, think about what impact this will have on you when it comes to applying for a mortgage.
Sign up credit boosting services that some high street banks offer. Showing that you pay your Netflix or Disney subscriptions on time when you have little, or no credit will help some lenders when deciding on your application
Remember to think about your account conduct. Sending money between friends on a regular basis may look to a mortgage lender that you can’t manage your finances well enough, and they may even class transactions as ‘regular’ and include them in your affordability, much like a bank loan or credit card statement. Also keep in mind a real person will go through all those transactions 😉
Be mindful when using finance apps such as Klarna. Amazing as this may be for some purchases, remember, it is still credit and some lenders will look at this when assessing your affordability.
Ensure you have documents ready for when they are asked for. This is generally 3 months banks statements, wage slips and your ID.
If you have any questions then why not give me a call to discuss.
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