Do all mortgage lenders use the 4.5x salary or are they more flexible?

savefortherain

Just been running some numbers for a low income, single person, no dependents.

Salary = 17500 (full time min wage, a fair few of bigger companies pay more but lets use this for now)

House Price = 120000 (going to ignore fees for sake of simplicity)

Deposit = 6000 (5% not a huge amount but with rising costs, not easy to save up for if starting from scratch)

According to mortgage calculators at 3.5% that means a monthly payment of around £500 on a 30 year mortgage. Brilliant, you may say, easily affordable for someone who brings home 2.5 times that after tax. Beats rental prices and although there are maintenance and repair costs to factor in, that is offset by the fact you paying towards your own house, not someone elses, right?

But there's a problem, a mortgage of 114k is 6.5x the salary. Do lenders really reject these types of mortgages that are easily affordable by sticking to a rigid lending calculations and hitting the "computer says no" button. Or do they assess each application on a case by case basis? Note that adjusting the figures to 4.5x and 25 years results in a £400 a month repayment. Not much difference, really. A couple of amazon flex shifts a month.

Or maybe I've got my figures wrong, but even if mortgage rates went a lot higher at say 7% (stress test), it should still be affordable at around £750 a month. A lot of luxuries to cut back on or doing overtime/second income work, but still able to pay the mortgage. Maybe take in a lodger, I dunno, but my point is, is that the mortgage seems a safe investment for the lender, though I am happy to be told otherwise.

The really sad thing is in the bigger city areas, 120k doesn't actually buy you that much. Shared ownership seems way more expensive and poorer value than my above figures due to the extra price of new builds and having to pay rent as well as the mortgage. In fact, as far as I can see, shared ownership is downright bizarre since it requires certain criteria and long waiting lists like it is housing benefit. What a mess for the working class.

mcpitman

Not many, if any, mortgages use salary multiples anymore.

It is all about affordability, looking at your incoming and outgoings. They then reduce loan amount accordingly for any debt exposure you may have.

Somewhere like Nationwide will have an affordability calc on their website, that would give you a better idea.

kingstreet

An income cap can apply at particular income and LTV levels.

For example, Halifax caps lending at 4.49 x income on incomes under £40k at 95% LTV. Use the calculator to see what you can borrow but this will be the cap on your borrowing.

theoretica

The banks don't have an unlimited amount to lend on mortgages, so it won't only be a question of whether something is a safe investment for them, but also whether it is better than a different customer or not.   Would they rather lend their 100k to someone earning 17k or to someone earning 25k?

They also know people will come along and complain in hindsight, and probably prefer to deal with people complaining that the banks won't lend them the money they want to borrow than with a few people claiming against them for irresponsible lending.  All the mess of 105% mortgages will still be in their minds.

MaryNB

mcpitman said:

Not many, if any, mortgages use salary multiples anymore.

It is all about affordability, looking at your incoming and outgoings. They then reduce loan amount accordingly for any debt exposure you may have.

Somewhere like Nationwide will have an affordability calc on their website, that would give you a better idea.

Yes they do. The salary multiplier is the cap, and then the loan amount is adjusted down if there are issues with affordability. I was limited to 4.75 with Halifax due to my salary and LTV. There was no scope to go above this even though I was easily able to manage mortgage repayments on a bigger loan. These are Halifax's salary multiplier caps. 


The 4.5x multiplier OP is referring to is set by the FCA, not mortgage lenders. About 85% of loans granted by a lender have to be within 4.5x of an applicant's salary. 

Thrugelmir

savefortherain said:

According to mortgage calculators at 3.5% that means a monthly payment of around £500 on a 30 year mortgage. Brilliant, you may say, easily affordable for someone who brings home 2.5 times that after tax. Beats rental prices and although there are maintenance and repair costs to factor in, that is offset by the fact you paying towards your own house, not someone elses, right?

Lenders will use a far higher rate of interest when assessing affordability.  Over a 30 year time frame,   base rate could potentially return to a more normal 3.5% - 4.5% range. (Where the BOE would like it to be).  Mortgages could therefore easily be at 6% interest rates as a consequence. 

lookstraightahead

As someone where both of us have had more than one income but have had to base our mortgage on the PAYE ones (least secure really), I think it's a rubbish system.

someone earning a really high salary from one job can borrow more for sure, but will crash the hardest if they lose their job and will find it harder to get one like for like, whereas those in lower incomes are much more likely to get another job and have two, or three.

Anyway op, if you want a big mortgage, you need to find a job that pays more (which would be more risky in my opinion that the great flexibility you have in the way you work at present - very savvy).

kingstreet

lookstraightahead said:

As someone where both of us have had more than one income but have had to base our mortgage on the PAYE ones (least secure really), I think it's a rubbish system.

someone earning a really high salary from one job can borrow more for sure, but will crash the hardest if they lose their job and will find it harder to get one like for like, whereas those in lower incomes are much more likely to get another job and have two, or three.

Anyway op, if you want a big mortgage, you need to find a job that pays more (which would be more risky in my opinion that the great flexibility you have in the way you work at present - very savvy).

A secondary source of earnings, perhaps from self-employment, can be included by many lenders as long as you have the evidence to back it up.

SavingPennies_2

£500 a month is *not* a lot for a salary of 17000 once you deduct council tax, utilities, food, living costs etc. and that's before repairs, unexpected emergencies, savings.. The bank wants to know you can afford it and have wiggle room if your circumstances or the interest rates change, saying you will scrimp to get by or take a second job might work in reality but won't cut it with the bank.

savefortherain

SavingPennies_2 said:

£500 a month *is* a lot for a salary of 17000 once you deduct council tax, utilities, food, living costs etc. and that's before repairs, unexpected emergencies, savings.. The bank wants to know you can afford it and have wiggle room if your circumstances or the interest rates change, saying you will scrimp to get by or take a second job might work in reality but won't cut it with the bank.

It's not a lot, if a single person without dependents is not saving at least £200 a month then they need to use the moneysavingexpert tool. Even more if not running a car and using public transport.

Remember for people on the absolute minimum wage, their earnings can only go up. Promotions, second jobs, zero contract side hustles, money saving schemes, overtime, lodgers.

The whole 4.5x system seems designed to not just protect from reckless borrowing/lending but also prevent FTBs getting on the ladder.

Thrugelmir

savefortherain said:

SavingPennies_2 said:

£500 a month *is* a lot for a salary of 17000 once you deduct council tax, utilities, food, living costs etc. and that's before repairs, unexpected emergencies, savings.. The bank wants to know you can afford it and have wiggle room if your circumstances or the interest rates change, saying you will scrimp to get by or take a second job might work in reality but won't cut it with the bank.

The whole 4.5x system seems designed to not just protect from reckless borrowing/lending but also prevent FTBs getting on the ladder.

Following the collapse of Northern Rock (and others). The mortgage market review was conducted and changes implemented. Not as simple as an income multiplier.  Lenders have constraints as to exposure.