If you are wondering how much of a mortgage you can acquire based on your salary, the question, in technical terms, is the income multiple you are likely to get.
To put it straightforwardly, a mortgage salary multiple is a certain number of times your annual salary, which becomes your mortgage loan.
For example, if you earn $25,000 per year, a $125,000 loan would mean you get a 5x mortgage salary multiple.
This is a seemingly simple
way to gauge a borrower’s affordability, so
as to provide the lender with security that the money will, in fact, be repaid
unless there is a negative change in the
borrower’s financial circumstances.
As simple as mortgage multiples sound, however, they have become rather complex over the year, with multiple of over 5 becoming a dream – with less than 1% of all borrowers being fortunate enough to get it.
How Mortgage Salary Multiples Have Evolved
A few decades ago, lenders used to have set income multiples for all borrowers. For example, one lender would have a policy of giving a 4x salary multiple, while another may decide on 4.5x.
This began to change in the early 2000s, when lenders began to use more detailed methods of calculating affordability, owing to the fact that people’s incomes and expenses also became complicated with advancements in technology over time.
This was when mortgage affordability calculators came into being, making it rather convenient for potential buyers as well as brokers to establish an idea of their borrowing capacity. The lending market has since progressed on to what is known as an Affordability Model.
While mortgage salary multiples are still capped in this mode, the algorithm of calculating a potential borrower’s affordability is more detailed than ever, taking into account various factors to reach a ‘disposable’ monthly income – that which is remaining after taking care of all financial outgoings.
How is the Mortgage Affordability Model Different?
While income multiples are straightforward and based on salary, a mortgage affordability model is based on disposable income, taking into account the various sources of earning and the extensive expenses the modern man has.
The model operates on the simple idea that, for example, a single man with a $20,000 annual salary and no financial dependants would have a larger amount of money to spare for loan repayments than someone who has an unemployed spouse, children, and elderly parents to support on the same salary.
The model aims to provide a more accurate result, taking into account the smallest of factors like pension deductions and car allowances.
Mortgage Affordability Calculator
While there is no universal calculator all lenders and borrowers can use to determine the amount of money the latter can afford to pay in loan repayments every month, different mortgage affordability calculators are used.
Most lenders have their
own calculators where they key in income and expenses.
Some also have the added feature of indicating the monthly payable amount and the interest payable on it. The calculators have similar algorithms, but varying degrees of details of net income. While these are effective and can provide an estimate of the mortgage one can acquire, it must be noted that this is not a final amount.
To get an actual figure, a potential borrower must actually apply for a mortgage, since other important factors like credit history cannot be factored into calculator algorithms.
Whether you work a job or are an entrepreneur, with a good credit history, the highest mortgage salary multiple you are likely to acquire is 5x.
If you are looking for a loan larger than that, you can consider secured loans, which can go up to 10x and have entirely different criteria for lending and borrowing.