READ ALL ABOUT IT

Can you afford your mortgage?

There’s a new phrase increasingly heard in the mortgage industry  - “mortgage affordability”.  It seems obvious that when you are considering how much you can borrow, your first move must be to work out how much you can afford to repay and its this fact that mortgage lenders are now focussing on..

This has been brought into the spotlight by the rapid and continuing rise in house prices in recent years - in some parts of the country such as London, prices are up over 20% in a year.  And prices are moving rapidly ahead of earnings.  Add to this the increase in `transaction` costs such as stamp duty, mortgage fees and recent increases in interest rates, which some predict may rise further, the whole issue of how much you can afford becomes ever more critical to Lenders.

But its not necessarily bad news for borrowers.  Many Lenders have now realised that the traditional approach, based on `income multiples` is increasingly unsuited to the UK’s residential market.  The old rule of thumb was that lenders would lend roughly 3.5 gross income for a single person and 2.5 times for a couple.  But now even big names are lending 4 or 5 times income.  Multiples have fallen out of favour as they don’t reflect very well the individual’s real situation and ability to meet their monthly repayments.  
The average age of house buyers is reducing (it was just over 29 in 2006) suggesting that affordability is not such a big problem as interest rates are historically low.

The result: more and more Lenders see multiples as a very unreliable method of assessing a borrower’s ability to repay and hence how much they are willing to lend.  So they now look at the individual’s ability to make the monthly payment, recognising individual variations and important issues like how much other debt people have.  So if you have a lower income but few debts and low outgoings, they may be willing to advance more that in the past.  And this new approach can be applied to all sectors of the market, from first time buyers, to re-mortgages, through to individuals with adverse credit situations or no proof of income.

So it makes sense to have a good look at your income and outgoings, maybe preparing a list before you talk to potential lenders.  “Affordability”, the new watchword, could work in your favour.

< Back to index

Copyright First Union 2007