There are two questions we get asked almost on a daily basis. “Can I get a mortgage in my situation?” and “How much can I borrow?”. In this article, we’ll explore the latter.
In the 1980s and 1990s, there was little technological intervention in the mortgage application process. You will make an appointment with your local building association manager, and they will interview you.
Often, they will encourage you to bank with them until you prove yourself creditworthy. After this period, you will then be given the equivalent of a preliminary agreement by the principal, including advice on how willing they are to lend you.
Some people see this as a very personal process and logical approach. However, it sometimes led to inconsistent decisions as lending evidence was left to be interpreted by the principal. In other words, you could have approached the same building society in a different town or city and gotten a different result.
With the aim of making it fairer and lowering costs, lenders have moved to automated affordability calculations. “Caps” were implemented so that they would not lend you more than 3 or 4 times your family’s income, for example.
As the 2000s progressed, lenders became more generous with the amount they would lend. Some lenders have even started offering self-certified mortgages where no background checks will be performed.
Then, in 2008, the market crashed. The next two years saw lenders closing the doors and creating a very cautious lending environment. This made it difficult for many people to get on the property ladder.
approach at present
After restoring the index, the regulator launched the Mortgage Market Review (MMR) in 2014. This was a new set of guidelines for lenders to adhere to that saw the end of the old pattern of income multiples that did not take into account household expenses.
Prior to 2014, two applicants with the same income could borrow roughly the same income. This was regardless of how much they spend each month. But then we saw the introduction of new affordability models, and an exploration of how applicants manage their money on a monthly basis.
There is still a “cap” in effect with most lenders not exceeding 4.75 times your annual income. However, they now consider your spending habits before they decide how much you will loan. For example, if you have high childcare costs, many credit obligations and a student loan, they will offer you less than your friend who has none of these expenses.
Here at ManchesterMoneyMan.com, we’re constantly surprised by the huge differences from lender to lender. Some lenders seem to penalize low income earners (maybe they are not looking for this type of applicant). Others see pension contributions as a fixed outgoing, so they often lend less to individuals who pay more in their pension.
They really are course horses, and if you need to increase your borrowing capacity to get the home you need to buy, you’ll need a local real estate broker on your side. Someone who can research the market on your behalf to see if anyone will loan you the amount you need given your unique circumstances.
How much can I borrow?
If you are wondering “How much can I borrow?” And looking to take out a mortgage, you should sit down with a counselor and work together to make sure the payment feels right to you.