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How Do UK Mortgage Providers Use Income Multiples to Calculate Affordability?

The in-depth guide to understanding income multiples, mortgage affordability metrics, and varying lender policies when calculating your eligibility for a borrowing product.

How Do UK Mortgage Providers Use Income Multiples to Calculate Affordability?

Your income matters when it comes to a mortgage since most lenders will use a multiple of your annual income to work out the maximum they can lend.

The complication is that every lender uses a different calculation - and will have other eligibility criteria that they take into account.

Here, the Revolution Brokers team explains how mortgage calculations work and how your salary will impact the amount you can borrow.

To find out what mortgage you can apply for or help to achieve a higher mortgage value on a lower income, give us a call on 0330 304 3040, or email at [email protected].

How Does an Income Multiple Calculation Work?

A lender will take your annual salary and multiply it by a fixed number to arrive at a maximum mortgage limit in a nutshell.

However, more and more lenders are offering flexible terms, so being rejected for a mortgage by one lender does not mean that another will not be able to accommodate your application.

Other lenders do not have a maximum mortgage calculation and will use different methods to identify whether they can lend to you.

What is the Maximum Salary Multiple I Can Get a Mortgage For?

This all depends on the circumstances, such as:

  • Whether you are applying as an individual or with a joint applicant.
  • How much you earn.
  • What sort of employment you have.
  • Your credit score and history.
  • How much deposit you have available.

Lenders might also consider other debts, your regular outgoings, and any additional income sources in their calculations.

For example, some lenders will include benefits in their calculations, whereas others will not.

  • Four to 4.5 times annual salary is a typical mortgage calculation.
  • Some lenders can offer up to five times your income.
  • In some cases, you can borrow six times your salary, although this will depend on meeting all the other lender's criteria.

The below table shows what sort of mortgage you might be offered from different lenders, depending on their maximum lending policy:

Salary

Lender A - 3 x income

Lender B - 4 x income

Lender C - 5 x income

Lender D - 6 x income

£35,000

£105,000

£140,000

£175,000

£210,000

£40,000

£120,000

£160,000

£200,000

£240,000

£45,000

£135,000

£180,000

£225,000

£270,000

£50,000

£150,000

£200,000

£250,000

£300,000

£55,000

£165,000

£220,000

£275,000

£330,000

£60,000

£180,000

£240,000

£300,000

£360,000

£65,000

£195,000

£260,000

£325,000

£390,000

£70,000

£210,000

£280,000

£350,000

£420,000

Does My Mortgage Deposit Change the Maximum I Can Borrow?

Yes, it does because the higher your deposit, the less risky the mortgage, and the more generous a lender is likely to be with their income multiple calculations.

Most UK lenders will go up to 95% of the property value for a residential mortgage, so you need a 5% deposit as a minimum. Other lenders need at least a 10% deposit, and others will require a higher value - buy to let mortgages usually require a 25% deposit.

What Mortgage Value Can I Apply for Given my Annual Income?

The upper limit is around six times your annual salary, but this isn't a standard multiplier to find.

To be eligible for a mortgage at six times your income, a lender will need you to meet several criteria, such as:

  • A significant salary, with a permanent PAYE role.
  • Larger deposit value.
  • Clean credit history.
  • Good debt-to-income ratio.
  • Mortgage term that ends before retirement age.

It's worth remembering that these are general criteria. Revolution works with many more specialist lenders who can consider circumstances outside of the norm - such as self-employed applicants, or those with bad credit.

How Can I Increase My Maximum Mortgage Offer?

The best way to get a more extensive mortgage offer is to ensure you only apply to lenders whose criteria you meet. Each lender has its own policies and will depend on lots of factors such as:

  • What type of job or employment you have.
  • Any additional earnings or revenue streams.
  • How many applicants are on the mortgage application.
  • Your regular outgoings and any existing debt.
  • The level of deposit you have available.
  • Your credit score and credit rating.
  • What sort of property it is, and whether it is a standard construction.

Can An Online Mortgage Calculator Work Out My Maximum Mortgage?

Online calculators are useful and can give a rough idea about the kind of maximum mortgage you could get through a mainstream lender.

Most calculators ask for your income, and regular outgoings, and work through a generic calculation. However, this cannot be specific to your circumstances and does not consider particular criteria, variable calculations used by the lender, or any other factors such as using Help to Buy.

The Revolution mortgage calculators can indicate your mortgage maximum, but the best way to get an accurate idea of how much you can borrow is to give us a call on 0330 304 3040.

How Does the Maximum Mortgage Calculation Change with Different Types of Employment?

Lenders typically prefer PAYE employment, since this is usually stable and reliable, backed with an employment contract.

There are, of course, many different types of income, including:

  • Self-employment.
  • Contractors
  • Agency work.
  • Bonuses and commissions.

Suppose you are looking for a mortgage in any employment other than PAYE. In that case, a broker is your best bet to recommend lenders who have experience in lending to freelancers, or self-employed business owners, for example.

How Many Lenders Will Offer Me a Mortgage Based on my Employment Type?

As we've seen, lenders prefer standard basic pay since it is the most stable form of income. The below is a rough indication of how likely a lender is to consider your application based on your type of employment - and how much of that income the lender will include in their mortgage calculation.

Type of Income

Proportion Included in Mortgage Calculation

Evidence Required

Basic PAYE salary

100%

Payslips or contract

Overtime in PAYE employment (regular)

50% - 100%

Average of last three months

Overtime in PAYE employment (irregular)

Zero up to 100%

Average of last three months

Annual bonuses

Zero up to 100%

Payslips or P60

Quarterly bonuses

Zero up to 100%

Payslips - an average of last year

Monthly bonuses

Zero up to 100%

Payslips - an average of last three to 12 months

Commissions

Zero up to 100%

Payslips - an average of last three to 12 months

London weighting

Zero up to 100%

Payslips

Car allowances

Zero up to 100%

Payslips

Shift allowances

Zero up to 100%

Payslips - an average of last three months

How Do Self-employed Mortgage Lenders Calculate Maximum Income Multiples?

Most lenders will ask for three years of accounts and work out the maximum they can lend based on the business net profits, or the salary and dividends you have paid yourself from your business.

Provided you have the accounts and documentation to prove your income, the calculation basis itself is pretty identical to that for employer applicants.

There can be complications if you don't have three years of trading, or have a more complex income structure - there are still plenty of options, but it's about finding the right lenders who offer mortgages on the right terms!

How Do Mortgage Income Multiples Work for Ltd Company Directors?

In most cases, a lender will consider your salary and dividends drawn, and average out that income over the last two or three years.

Other lenders will offer more generous terms and use just the last trading year as their calculation basis - which is an advantage if you are a new business owner, or have significantly expanded recently.

Some lenders do not use company accounts, but instead, calculate the maximum they can lend against your SA302 self-assessment tax returns. This can be advantageous if you have changed your business type or do not have year-end accounts aligned with the tax year.

Why Do Ltd Company Owners Need a Specialist Mortgage Lender?

Business owners can usually apply to any mortgage lender - but each will have a different policy on how they calculate their mortgage offer. For example, some will not include bonuses or commissions in their calculation and won't offer as high a mortgage as another lender might.

Other lenders require the business to have been trading for a specific number of years, so they won't help relatively new company owners.

The key is to consult a whole-of-market broker who can match your borrowing requirements with your circumstances to avoid making any failed applications.

Below is an illustration of what you might be offered from two different lenders, one a high street bank and another a specialist lender, based on a salary of £10,000 with a £15,000 dividend and business net profits for the year of £40,000:

Type of Lender

Income Considered

Maximum Mortgage

High Street Lender

Salary and dividends x 4.5 times.

£112,500

Specialist Lender

Salary and net profit x 4.5

£225,000

As you can see, the maximum mortgage you can get will depend heavily on applying to the right lender, and so a broker is the best option to recommend the right mortgage provider.

What Mortgage Can I Get as a Newly Self-employed Business?

Most lenders will use the same income multiples for new businesses as for any other, which tend to be around four to five times your annual earnings.

However, many lenders need to see at least two or three years' worth of accounts, therefore restricting how much they will lend.

If you have been trading for one year, you can find self-employed mortgages through niche lenders, provided the business has made money, and the records can be evidenced with filed accounts or tax returns.

There are mortgage options for newly self-employed businesses even if no accounts have yet been filed - get in touch with Revolution at 0330 304 3040 for more information.

What Additional Earnings are used in a Mortgage Calculation?

Most lenders will include the following types of income:

  • Child benefits
  • Child tax credits
  • Maintenance income
  • Working tax credits
  • Disability allowances
  • Investment earnings
  • Rental income
  • Bursaries
  • Mortgages with stipend income
  • Foreign income
  • Pension income

How much of that income is included depends on the lender - it is, therefore, vital to consult an independent broker who can manage your application appropriately.

Can I Borrow a Larger Mortgage with a Partner?

Potentially yes - a joint mortgage application will consider both of your salaries or incomes.

Many lenders cap mortgages at four applicants, or might accept an application from four joint homeowners but calculate the maximum mortgage based on only the two highest-earning applicants' earnings.

Do My Living Expenses Impact the Maximum Mortgage I Can Get?

Yes, lenders will want to know about other debts, for example, to ensure you can afford to keep up with the mortgage repayments. They might ask for information about:

  • Other debts
  • Your dependents
  • Any other mortgages

How much your outgoings impact your mortgage offer depends on the lender. For example, some will ignore loans that will be paid off before the mortgage completes. Others will disregard defaults that will soon expire from your credit file.

Most lenders don't have any specific policies where you have children or other dependents, and some will disregard childcare-related expenses when calculating the maximum you can borrow.

What Outgoings Do Mortgage Lenders Disregard in Affordability Calculations?

There are a few types of regular expense that are either not significant enough to be included, or are disregarded by most mortgage lenders:

  • Mobile phone costs do often show on a credit report, as they are a contract. However, given the variability of a monthly bill, most lenders will not include this as a specific cost outside of the general costs of living.
  • Credit cards or debt that will be paid back before the mortgage completes are often disregarded. By ignoring the final monthly repayments, a lender can offer a higher mortgage value.
  • Loans that will be paid back in six months are often also ignored, since the expense will discontinue soon, and well before the mortgage term ends.
  • Buy to let mortgages can be disregarded, provided the rental income comfortably covers the mortgage cost.

Does the Length of my Mortgage Term Impact the Affordability Calculation?

Yes, suppose you are looking at a residential mortgage for longer than the typical 25 years. In that case, you might find that you can borrow more since the monthly repayments will be lower, and the affordability criteria easier to meet.

Is a Secured Loan a Better Alternative to Get a Larger Mortgage?

In general, a mortgage lender will not offer anything above six times your annual income - and that is a very unusual offer.

A secured loan can be a viable alternative since the criteria are less strict. You can borrow as much as ten times your annual income on a secured loan.

Expert Support with Mortgage Affordability

Whether you have an unusual income structure and are struggling to find a lender, or are unsure what you can borrow based on your salary, we can help.

Get in touch with the business loan broker team on 0330 304 3040, or drop us a message at [email protected] and we'll be in touch to arrange a good time to talk.

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