Help! Affordability: Beyond the AIP

Saga

Looking for help to try to understand affordability testing please.

OK so, for example a FTB gets an agreement in principle (AIP) from a mortgage lender for a loan with a 4.5 LTI ratio for a given repayment term.

Beyond the general advice to ensure as tidy a credit history as possible, make no further credit applications that leave a hard search, demonstrate stable employment for the last few years and limit all discretionary spending in the six months or so leading up to an application just how do lenders assess affordability?

I assume different lenders have their own models and tools but in general what list of tests and pass/failure criteria are included in a typical affordability assessment?  For example, is the proposed monthly repayment tested against a limit of say 40% of net income, and if this is passed is the same test applied to a rise in interest rate of 5%?

ACG

Most lenders are not overly fussed about what is on your bank statements (within reason).
If you spend £300 a month no food or £500, it wont make any odds with most lenders as they will just ONS figures. 
Some lenders (typically specialist lenders and little building societies) will go through your bank statements line by line and add everything up. 

The 4.5x income multiplier is generally a maximum, some lenders may go up to 5 or even 5.5x in certain circumstances but that does not necessarily mean they will lend more. 

An example of this could be:
Applicant on £20k income, no kids £200 a month on loans, normal spending. 
Lender 1 - £20k x 4.5 = £90k. They use ONS figures and as most people have debt, they actually ignore the £200k. 
Lender 2 - £20k x 5 = £100k. However, if they do not use ONS figures but actual figures. They may then deduct the £200 a month. £20k - £2,400 (£200 x 12 months) = £17,600.  £17,600 x 5 = £88,000. 

This is a very simplistic calculation and wont be right but it is just to give you an idea of how higher income multiples does not necessarily mean a larger mortgage. 

In short, forget about trying to work out how the affordability calculations work, they all differ. Just go and play around with the affordability calculators (just ensure you are putting in the correct info otherwise you will get the wrong results). 

Saga

ACG said:

In short, forget about trying to work out how the affordability calculations work, they all differ. Just go and play around with the affordability calculators (just ensure you are putting in the correct info otherwise you will get the wrong results). 

I take that on board thanks. Is there a maximum repayment:net income percentage you would recommend not exceeding?

SuseOrm

Ideally 1/3 of your income 

Saga

SuseOrm said:

Ideally 1/3 of your income 

😪 oh not much

getmore4less

Saga said:

ACG said:

In short, forget about trying to work out how the affordability calculations work, they all differ. Just go and play around with the affordability calculators (just ensure you are putting in the correct info otherwise you will get the wrong results). 

I take that on board thanks. Is there a maximum repayment:net income percentage you would recommend not exceeding?

Its personal not a one size fits all.

Also pretty arbitrary as you can make it what you want by adjusting term.

Income makes a big difference to what is sensible and available.

2 people living similar life styles the one on £50k can afford a much higher % than the one on £25k

2 people same income the one with 2 kids has higher demands on their income.

LTV if high and higher rate might be worth throwing more money at the debt for a few years  bring it down and get the rate down then free up disposable

Priorities eg. some want holidays some prefer to pay that into a property.

...

ACG

Saga said:

ACG said:

In short, forget about trying to work out how the affordability calculations work, they all differ. Just go and play around with the affordability calculators (just ensure you are putting in the correct info otherwise you will get the wrong results). 

I take that on board thanks. Is there a maximum repayment:net income percentage you would recommend not exceeding?

No. 

Someone with a higher income would usually have more disposable income than someone on minimum wage. 

Saga

Does that mean there are plenty of high street lenders who are very happy lending to someone, having met their AIP criteria, would be left with say 10% disposable income after fixed/essential costs?

ACG

Saga said:

Does that mean there are plenty of high street lenders who are very happy lending to someone, having met their AIP criteria, would be left with say 10% disposable income after fixed/essential costs?

In the nicest possible way you are asking the same question in different ways. 

Stop trying to think about it and just have a play around with the affordability calculators. 
In answer to your question probably not because mortgage lenders have to stress test your mortgage payments. So if you only have 10% left, by the time they account for the higher interest rate your not going to have enough. 

Natwest - https://spa.mortgages.natwest.com/calculator/residential-affordability
Barclays - https://resources.barclays.co.uk/mortgage-calculators/residential-affordability
Post office - https://www.bankofireland4intermediaries.co.uk/calculators/affordability-calculator/ - the easiest calculator of the lot. 

housebuyer143

As above. Lenders have an affordability calculator for a reason. If you want really accurate ones use the one on the intermediary page. 
Put all the correct figures in and that's the amount that you are likely to be able to get.

purplepardalis

Sorry to hijack but I have a related query, does higher income affect ratio at all? If you earn around 90-100k and have credit repayments, would you get the 4.5 ratio or would it be downgraded?
Or is that again on a case by lender basis? And perhaps dependent on deposit?