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How your income affects your mortgage chances

Bank of England reveals that 140,000 people borrowed 'risky' amounts last year

One in four people have borrowed as much as four times their annual income to buy their way into their dream home, while 140,000 have pushed themselves into a riskier levels of borrowing at more than four-and-a-half times their salary, the Bank of England has revealed.

With house prices rising faster than incomes over the past few years, home buyers have had to stretch themselves to step up the property ladder. But is it possible to borrow too much?

Since 2014, the Bank of England has been trying to keep the lid on what it calls ‘risky’ lending, but the Bank’s own new data shows that more mortgages are being approved at higher income multiples.

Here, we explain how lenders assess affordability when you apply for a mortgage, the difference between applying alone or with a partner, and how to ensure you’re not overstretching your finances.

  • If you’re applying for your first mortgage, you can access impartial, expert advice about the options available to you by calling Which? Mortgage Advisers on 0808 252 7987.

Income multiples: what are they?

One of the ways lenders assess how much you can borrow is by looking at your annual income.

As a rule of thumb, lenders will allow you to borrow up to 4.5 times your income, as long as you meet their other criteria.

That means that if you earn £30,000 a year, you could be able to secure a loan of £135,000 – or if you’re buying with a partner and your combined income is £60,000, you could be eligible for up to £270,000.

It’s vital to point out that this is only one of the many ways lenders assess affordability.

In recent years, affordability testing has become more rigorous and lenders have adopted a much more holistic approach to assessing finances and ensuring borrowers can meet repayments.

What are the rules on annual income?

In 2014, the Bank of England told lenders they could only approve 15% of mortgages at more than 4.5 times the borrower’s annual household salary – a multiple the bank defines as ‘risky’.

While this figure might seem low on paper, analysis of the Bank’s data shows that up to 140,000 people took out a loan at above 4.5 times their income last year – up 15% year-on-year.

Is ‘risky’ borrowing a problem?

The percentage of mortgages granted at over 5 times annual salary has dropped below 1% in the last few years, as these tighter restrictions have taken hold.

At a lower level, however, approvals are on the up – with a ‘bunching’ of mortgages granted at between 4 times and 4.5 times annual household income.

Mortgage approvals at this level increased from 12% in June 2014 to 16.5% in March 2017, while approvals at 4.5 times to 5 times annual income dropped very slightly from just over 10% to 9.88%.

This hasn’t gone unnoticed. The Bank of England director Alex Brazier said last month that lending at more than 4 times income had increased from 19% to 26% of overall approvals in two years.

*Data taken the end of June in each year, except for 2017 – where figures are from the end of March

Income multiples: what do the banks say?

Lenders are at pains to reiterate that while annual income multiples are used as a guide, they are only part of their overall affordability assessments.

Which? asked the 10 largest mortgage lenders (based on data from 2016) how they assess income multiples. All but Barclays and HSBC responded, and told us the following:

Lender (ordered by market share) Policy
Lloyds Banking Group Flat cap of 4.75 times annual income for sole or joint applicants up to £500,000. 4 times income above £500,000.
Nationwide Takes a ‘holistic view to assessing mortgage affordability’ and applies a ‘stressed rate’ to ensure customers can withstand any future interest rate rises.
RBS Loan-to-income caps are only used as an additional control. In the main, RBS calculates a customer’s ‘free income’ (reflecting cost of mortgage, living expenses and commitments) at a stress rate of 6.75%.
Santander Cap of 4.45 times annual income for first-time buyers and 5 times income for existing home owners.
Coventry Building Society Income multiples not used. Coventry assesses affordability on income, commitments and living expenses.
Virgin Money No ‘blanket maximum income’. Uses a range of criteria determined by individual circumstances.
Yorkshire Building Society 5 times annual income if earnings are over £70,000, 4.49 times if under £70,000. Recently increased limit to 5 times income for loan sizes above £500,000.
TSB 4.5 times annual income for sole and joint applicants.

Is it different if you’re buying alone?

Without a second income to boost your affordability, it can be tough to buy a home in the current climate.

Unfortunately, this is reflected in the affordability levels of mortgages granted to sole buyers.

As the chart below shows, the percentage of mortgages taken out by individual buyers at over 4 times their annual income now outstrips those granted at 3 to 4 times annual income.

Ensuring you can afford your mortgage

With all of this in mind, it’s important to ensure you can afford the amount you’re borrowing – taking into account the various additional costs of buying a home, such as stamp duty, house surveys and conveyancing.

David Blake of Which? Mortgage Advisers offers the following tips on making sure your mortgage is affordable:

  • Think about your personal circumstances moving forward – are you expecting any changes in your career or personal life?
  • Consider guarding against potential rate rises by looking at longer-term fixed rate deals
  • By all means take advantage of the current low rates, but overpay on your mortgage by as much as you can afford while rates remain favourable
  • Be careful when attempting to borrow on unguaranteed income such as commission and bonuses – some lenders are less strict than others regarding this
  • Remember that just because you can be approved for a mortgage for the amount you want, that doesn’t necessarily mean you should

Your home may be repossessed if you do not keep up repayments on your mortgage.

Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.

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