To answer this question, we need to look back at previous lending systems. This will help us understand why the current system is the way it is and help explain what lenders are ultimately looking for.
Back in the 80s and 90s, there was very little technological intervention in the mortgage process.
Back then you would make an appointment with your Building Society Manager who would encourage you to a bank and save with them if you weren’t already.
This would allow them to judge whether you were creditworthy. If you were, they would grant you the equivalent of an Agreement in Principle, followed by advice on how much they were prepared to lend you.
Arguably, this was a highly personalised, common-sense approach. However, it often resulted in inconsistent decision-making as the Building Society Manager interpretation of the guidelines themselves and lending based on their view of the criteria.
With a view to eradicating the inconsistencies and to cut costs, lenders moved to automated affordability calculations. This resulted in multiplier caps being applied so that managers couldn’t lend you more than, say, 3 or 4 times your household income.
As the 2000s progressed, lenders became more generous in how much they would lend. Some even offer self-certified mortgages, which required no background checks.
In 2008, as we all remember, the market crashed which led to a difficult couple of years for those trying to get on the property ladder. The lenders battened down the hatches and opted for a much more cautious lending approach.
In 2014, following the recovery of the market, the regulator launched the Mortgage Market Review (MMR). This was a new set of guidelines for lenders to adhere to which said goodbye to the old-style income multipliers and brought into play other factors such as household expenditure.
Before 2014, two applicants with the same income could borrow roughly the same as each other. This was irrespective of how much they spent each month. The new affordability models took a much more in-depth review of how applicants managed their money on a monthly basis.
There is still a “cap” in place with most lenders not going past 4.75 times your annual income. However, they also analyse your spending habits. For example, if you have high childcare costs, lots of credit commitments and a student loan, they will offer you less than your colleague who doesn’t have any of that expenditure.
We are constantly surprised by the large variations from lender to lender. For example, some lenders seem to penalise low earners and others see pension contributions as a fixed outgoing. Both factors can have a significant impact on the amount they will be willing to lend you.
When it comes to finding a lender, it really is horses for courses. If you need to maximise your borrowing capacity to obtain the home you need to buy, then you’ll benefit from using a Mortgage Broker. They have the experience and knowledge to research the market on your behalf to see if anyone will lend you the amount you need.
If you’re wondering “How Much Can I borrow?” and looking to take out a mortgage, you should sit down with an Advisor and work out your finances together to ensure that the repayments feel comfortable to you.