MSE borrowing calculator very pessimistic?

DragonQ

We've been looking for a new house for a while and used the MSE mortgage "how much can I borrow" calculator to work out what houses we could afford. It reckons we can get a £400k ish mortgage. I just tried entering the same information directly into calculators provided by a few banks and they all say we can borrow about £700k!

What's with the huge disparity?

tacpot12

Because banks make profits by lending money, and they make more money by lending to people who can't really afford the loans! 

Many forum members will remember when interest rates were 15%. I had a mortgage with a ten year fixed rate of 9.99% for well over seven years. (I was able to pay it off before the fixed rate ended). You need to be careful that you don't take out a mortgage that you can't afford if interest rates rise. 

A 25 year mortgage for £700,000 with an interest rate of 9.99% will cost £6,355 per month! Can you afford this? 

DragonQ

Are you saying the MSE calculator is more of a "how much SHOULD I borrow?" rather than its title "how much CAN I borrow?"?

I suppose this could be clearer on the page itself. I am not too concerned about raising interest rates as we'd be getting a long fix and overpaying as much as possible. Also the housing market has needed higher interest rates for years and it's never happened. Don't see it happening any time soon.

Windofchange

I would probably be inclined to ignore the above response - it was people who couldn't afford the loans (sub prime) that crashed the banking sector in 2007/08 and caused a worldwide collapse of financial institutions. Banks want you to repay them their money, this is how they make profit. If you default it takes how many months of them getting no payment off you, and then they have the hassle of selling the property.

Also pointless talking about affording repayments on a mortgage at 10% interest rates. That isn't happening anytime soon, but you of course should consider if you can afford increased payments should rates rise. I can't really explain the discrepancy between this site and the bank's, but if I were to guess:

1) Banks have different risk appetites and different profiles of borrowers that they want to attract. Some banks will lend to you at higher amounts than others which is what we found when searching around a couple of years ago via a broker. There was about a £100,000 difference in what the best would lend to us (Nationwide / Halifax), and what the worst would (Santander, HSBC). Bit like with car insurance I guess - the business wants to attract certain borrowers, and is geared up largely to cater for them.

2) Does the calculator on this site take as much information as the bank does? I know when I was doing initial searches, the Nationwide one for instance asked for pages of info. When it came to do the DIP, we again had to fill out lots and lots of information. I've not used the calculator on this site / seen it, but if it is asking for quite a basic data set then it isn't going to be as accurate as the banks.

3) Speaking of data, the calculators on the bank websites are likely to be linked to more sophisticated algorithms utilising their in house datasets? Maybe a particular bank is looking to attract your sort of business and so they have given you a much larger loan than others might? You might qualify for higher lending multiples if you are in a certain profession or earn over a certain amount? Not sure if this site does this?

Bottom line I would say is either use a broker, or do a proper DIP on a couple of bank's websites - a DIP won't leave any marks on your credit file and it will give you a far better indication of what you can hope to borrow. 

Windofchange

Ok, out of interest I have just located and tried the mortgage calculator on this site. Putting in roughly what I did for when we brought a couple of years back, we actually ended up being loaned about 40% more than what that calculator says our maximum is. The figure produced on the page is the one that is in yellow on the chart, and that is about 3 times the figures I put in, so the figures shown are nowhere near what you in reality could achieve. This will be where the big discrepancy lies, and why figures you are getting from the bank's websites are much higher as they are showing you the full maximum of 4.5, maybe 5 x salary. I would definitely say ignore the calculator on this site. 

ACG

Mortgage lenders calculators have changed over the years, there is a bit more science in it than just generalising. The MSE one has probably not kept up. 

It was not uncommon for mortgage lenders to lend around 6x income, BUT the slightest bit of debt would start to reduce that down. 
Now, most mortgage lenders have a 4.5x income cap, BUT if you have debt, it does not necessarily reduce the 4.5x income.

grumiofoundation

It does seem the calculator may be somewhat erroneous.*

Like a previous poster I put in our details out of interest and got 178-243 (2.6-3.5x salary multiple) despite 4.5x our combined salaries being 310.5k. (Ending up borrowing just over 5x).

So I’d just ignore it. 

* in the text underneath it said “Lenders typically cap the loan-to-income ratio at around four-and-a-half times your annual salary, which is the upper limit in the red on the bar chart below.”

Whereas (unless MSE is using a non-Linear scale) the end of the red section for me was ~243 (3.5 not 4.5x)

getmore4less

a quick look. 1 applicant.

The yellow/red boundary is 4.5x for all numbers(rounded to nearest £1k)

small print says powered by L&C

It also says which perpetuates the myth lenders use the "score"

Be aware that your credit score also has a big impact