According to a 2017 revelation by Bank of England, about one in four people took out loans as much as four times their annual salary, while over 100,000 took ‘risky’ loans by borrowing at a 4.5 income multiple. Only about 1% of people get loans over 5 times their annual income.
This has raised important questions
regarding mortgages: What is the ideal amount of mortgage income multiples? Is it possible to borrow too much and to end up
financially straining yourself? What is the best way to judge affordability?
These questions have especially also risen because of increasing prices of property, economic downfall, and decreased global affordability. It is estimated that most millennials will never be able to own property at the age their parents and grandparents did.
Let us look at what mortgage income multiples are, how affordability is calculated, and what are the ideal multiples in different situations.
What are Mortgage Income Multiples?
Income multiples have long been a way of assessing a borrower’s ability to repay a loan. Normally, lenders will let you buy up to 4.5 times your annual income.
There are several factors that come into play when gauging affordability with income multiples; lenders will usually launch into extensive research on a potential borrower’s current and future sources of income and expenses, along with a detailed analysis of their credit history.
What is Your Ideal Income Multiple?
While you may want to get the largest possible mortgage, this may land you in trouble, and eventually, lead to problems like IVAs and CCJs. Once you have these blemishes on your credit report, they stay for five to six years, and while they don’t mean you can never borrow again, they certainly do limit your options.
Someone who has an IVA or a CCJ in their history may have to present facts about it even after it has expired and has been removed from the report, in case a lender specifically inquires about such.
This eventually reduces the mortgages you can get, increase the deposits you have to pay to convince lenders, and generally limits your marketplace.
It is in order to avoid running into these issues stemming from late or failed payments that it is essential you analyse your own financial situation before aiming for a certain mortgage income multiple.
For one, you must think about how your personal circumstances may change in the future in ways that may not be included in the lender’s analysis – like your plans to have a child.
You must also decide whether you would like to pay short-term increasing rates or long-term fixed rates, and how many years would you comfortably be able to pay off your loan in.
This goes on to say that no matter how extensive a lender’s analysis, there are factors they may overlook, and just because you get approved for an attractive mortgage doesn’t mean you should.
This is where expert mortgage brokers come into play for case-based advice and guidance on what to expect and how to plan.
How to Boost Your Affordability?
While a borrower can make sure they maintain a good credit history and minimise their expenses to get a large mortgage, experts often say the only way to make a massive difference in the amount you can borrow is to borrow with a partner.
Without a second income to substantially add to your affordability, it is likely that you will be able to convince your lender to increase the mortgage by as much as double or more. Lending with a partner especially helps if major expenses like children’s education, care of dependent elderly parents, and the likes are shared.
With an expert broker, you will be successfully able to decide on what mortgage income you should aim for, and how to get it.