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Mortgage Income Multiples

Mortgage Income Multiples

Pete Mugleston

To find out exactly what your eligible for and at what rates please or give us a call on 0800 304 7880.

How salary multiples impact how much you can borrow on a mortgage

We are frequently asked “what mortgage can I get on my salary?”, and the answer depends on various factors. Because all lenders have wide ranging criteria on the income they do and don’t accept, and have different ideas about suitable affordability limits, people often find it difficult to establish an exact borrowing figure.

With rising house prices, people are more and more often requesting the highest income multiple mortgage, meaning that it’s never been more important to get advice from someone who can find you the best mortgage income multiples possible.

In the guide below we explain the different factors affecting the amount you can borrow on your salary and income, including the impact different types of income can have, as well as deposit levels, credit commitments, and credit history.

As you’ll see, because every lender has different policy on what they deem maximum affordability looks like, getting the right advice from a specialist knows the market is often essential. We have provided a simple “mortgage salary calculator” to give you a rough idea of borrowing limits should all of your income be accepted and outgoings be calculated at a nominal cost and rate of interest, but really for exact figures you’re best making an enquiry and we’ll refer you to the expert.

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A brief history of Income Multiples and Affordability Calculators

Historically most lenders would use mortgage income multiples to establish the maximum someone could borrow. For example, many would offer a maximum mortgage of 4 x salary, so those earning £25,000 could borrow £100,000. For joint borrowers it might be 3x the combined salary, so incomes of £25,000 and £10,000 (£35,000 combined) would be capped at £105,000.

In 2003 lenders started to offer affordability calculators so applicants and brokers would find it easier to establish borrowing capacity before making a full application. They were simple and specific to the lender’s own income multiple policy for the time, with some also taking into account the impact of fixed outgoings (which tended to be a deduction of the annualised monthly outgoing from the maximum loan size).

Since then technology and lending policy have both moved on, and with the implementation of Mortgage Market Review (MMR) changes, most lenders now have a more accurate and often stringent “affordability model”, moving away from mortgage lending multiples almost completely.

Affordability model calculators still often cap lending at certain income multiples, but also use much more detailed algorithm to establish a borrowers’ maximum loan size, for instance, taking into account disposable monthly incomes, regular monthly outgoings that wouldn’t have been classed as commitments traditionally, repayments of credit at certain % rates of interest, and even adding in a higher than usual rates of interest to simulate a ‘stress-test’ of affordability if rates were to rise.

As detailed in our article here, MMR put the responsibility on lenders to act more sensibly when it comes to mortgage affordability, and changes had to be made to ensure customers were only lent the money they could repay. As a result, mortgage to income ratios changed and many people found themselves either unable to borrow what they want with certain lenders, or worse, trapped in their current mortgage unable to refinance elsewhere.

Thankfully, despite tighter regulation and lending policy, there are specialist lenders that cater for many of these borrowers that will a) take into account different income types others may decline, and b) lend much more generously than others. It’s just a case of knowing where to look.

What is a Mortgage Affordability Calculator?

An affordability calculator is designed to show an applicant how much they can borrow if they key in their income and outgoings. Some also offer an approximation of monthly costs and figures to indicate the total interest payable over the term. Each lender usually offers their own unique calculator that takes into account the varying degree of different income and outgoings, and gives a fairly accurate maximum lending figure without credit scoring/searching the borrower. To get a more accurate figure the borrower would need to actually make an application, as credit history/score can make a difference.

Mortgage Affordability Model Vs Income multiples

Traditionally, mortgage calculators would simply multiply your annual salary by 4 or 5, whereas more modern calculators capture information such as guaranteed monthly income, regular other income, monthly credit commitments and salary deductions, number of dependents, and notification of any future foreseeable changes in income or outgoings that may impact affordability. With this info the calculator will establish approximate disposable monthly income, and then decide what percentage of this it will consider for mortgage purposes. This is known as an affordability model.

Many calculators now also factor in far more detailed information designed to offer the most accurate result, including deductions from employers (i.e. pension, healthcare, share-save schemes etc.), and some go so far as to reference ONS data to factor in the real cost of living in the area you are buying.

Because every lender is different there’s often huge variation in the maximum loan lenders are prepared to offer, and most borrowers will find that some lenders offer 3x income and others over 5x. If you’re struggling to find a lender that will offer you the mortgage you need, then don’t worry, make an enquiry and one of the specialists can help.

Although most lenders now use more complex calculators to establish maximum lending, there are still some useful rules of thumb that act as a starting point when it comes to working out income multiples for mortgages to see how many times your salary you can borrow. In fact, if you’re using a broker they’ll likely use this as a starting point themselves before digging deeper into types of income and credit commitment.

To find the Mortgage lenders with highest income multiples can take some time and seem impossible if you’re going from door to door on the high street, but generally you won’t be far off knowing your limit is likely to be around 5x your income. In order to obtain such an income stretch you’ll likely need a good credit history, anyone with credit issues can expect to be capped at around 4-4.5x income. Find out more about getting a mortgage when you have bad credit here.

Factors affecting affordability

Impact of Acceptable income types on Affordability

In recent times we’ve seen a large trend in working arrangements and employment types moving away from more permanent/guaranteed/reliable positions toward more flexible, temporary and unique style contracts that fit a particular role. The increase in agency, contractors, self-employed workers and those on zero hours means that an increasing number of people have more complicated income sources, and even those on permanent contracts get shift and car allowances, overtime, bonuses, and various additional incomes on top of their basic pay. As all lenders treat these elements differently, finding one to take as much of your income as possible, and then one that uses the most generous affordability calculation can seem impossible.

Most lenders accept 100% of basic salary or net profit for self-employed applicants, but many differ on the amount of other earned incomes they’ll consider. For instance, some lenders only accept 50% of overtime, where others accept 100%; some will consider car allowance, where others won’t at all; some factor annual bonuses but ignore monthly and vice versa.

We receive hundreds of enquiries from people who’ve either had their mortgage declined or reduced because of the income source, and the good news is that there are several specialist lenders who consider 100% of these income types. So if your income is unique, if you’re having problems finding a lender to accept your income, or if you need the maximum income multiples you can, make an enquiry and we’ll refer you to one of the specialists who can help.

Earned Income

Below is a breakdown of the types of income that lenders are likely to consider at varying amounts…

Income type % considered Notes
Basic pay 100% Taken from payslips/contract
Regular overtime 50-100% Usually average of last 3 months
Irregular overtime 0-100% Usually average of last 3 months
Annual Bonus 0-100% Taken from payslips / p60
Quarterly bonus 0-100% From payslips (usually ave. of last 12 months)
Monthly Bonus 0-100% From payslips (usually ave. of last 3-12 months)
Commission 0-100% From payslips (usually ave. of last 3-12 months)
London Weighting 0-100% From payslips
Car Allowance 0-100% From payslips
Shift allowance 0-100% From payslips (Usually average of last 3 months)

Self Employed Mortgage Income Multiples (Sole Traders / Partnerships)

For straightforward self-employed applicants, where the business has been trading for 3 or more years and the income is derived from sole-trader net profit or ltd company salary + dividends, the above rules of thumb are generally true and most High Street lenders will lend up to 5 times income. How they calculate this can again vary widely lender to lender.

We receive hundreds of enquiries from self-employed applicants who have struggled to find a lender who’ll consider their income in the manner it is required to be deemed affordable, as well as scores of customers who’s situations are far more complex – for instance if they’ve only been trading a short time; they’ve recently changed trading style from sole trader to limited company; they have had fluctuating income over the last 3 years; or perhaps have chosen not to draw as much from the business as they could have done.

In these situations, most high street lenders and sadly many brokers just don’t know how to a) assess the accounts and identify the income correctly, and b) they don’t know the market well enough to find the lender that will approve them. Thankfully the specialists we work with arrange these types of mortgage every day, so make an enquiry and get approved ASAP.

There are several ways lenders view the income received by Limited Company Directors, and each will take different figures into consideration.

Self Employed Mortgage Income Multiples (Ltd  Company directors)

Salary and Dividends

The majority of lenders calculate income based on a directors’ salary + dividend Income drawn over the year, as shown in the annual accounts. Most will average that over the most recent 2-3 years depending on the lender and how long the business has been trading, and some will use the most recent years trading figures (great for new businesses or those who have had a good year). As directors also have to complete a personal tax return every year, there are some lenders that consider income as shown on the HMRC self-assessment returns SA302 instead of using the company accounts – this is particularly useful for those who have changed trading style from sole-trader to Ltd company, or who have a relatively new business and they company year-end is split over 2 tax years, meaning that (depending on the time of application) personal income may look less on the company accounts than it does on personal tax returns.

Thankfully there are specialist lenders that take a much more reasoned and flexible approach to self-employed borrowing like this, so speaking to a specialist broker who knows the market is particularly important – we get no end of enquiries from directors who are credit worthy and have been wrongly declined.

Retained Profits

For tax purposes, a lot of company directors draw a minimum wage (up to the tax free allowance), and decide to only draw a small portion of the available profits as dividends from the company as they simply don’t need the money at the time. That however, can cause issues when it comes to applying for mortgages, as most lenders only consider the salary and dividends drawn from the business and not the ‘retained profit’, and thus often won’t lend the amount the borrower needs can could rightly afford, which can be frustrating for many directors who have a business that could easily pay them more if they wanted to.

The good news is there are lenders who will look at the overall profitability of the business when working out the borrowing capacity of the director. They will assess the income of the director in one of 2 ways: either share of net profit before tax plus salary (this generally gives the best result); or share of net profit after tax plus salary.

Lenders that consider retained profits can increase borrowing capacity massively for many limited company directors, as explained in the following example:

Salary = £10,000, Dividend = £15,000, Net Profit before Tax = £40,000

Incomes considered Typical High Street Lenders(Salary and Dividend) Specialist Lenders(Salary and net profit before tax)
Income calculation £25,000 x 4.5 (£10,000 + £40,000) x 4.5
Total lending £112,500 £225,000

This shows the importance of having specialist advice to find the right lender, as it can mean the difference between being able to finance the home you want versus sacrificing your plans. if you have complex income or accounts, the difference in the maximum loan speaks volumes and is why we see lots of enquires from people declined by their own bank or other “whole of market” brokers that don’t seem to understand what they are looking at.

Companies with increasing profits

Many self-employed business owners, whether Sole-trader, Partnership or Ltd Company, have seen dramatic increases in their businesses’ turnover and profitability as they become established and the economy improves. It would make sense then that these people increase their general spending and of course, look for a newer/larger/better property to live in (as well as investment property of course). When it comes to making an application however, many owners still find it hard to borrow the money they need, as most lenders will average their most recent years’ successes against the previous one or two years lesser trading figures, the impact of which is a lower maximum loan size.

For example, looking at the following sole-trader with a typical 4.5 times salary mortgage, the difference can be huge:

Net profit = 3 years ago £15k, 2 years ago = £25k and most recent year = £35k (or could be salary and divided/retained profit for limited companies)

Incomes considered Typical High Street Lenders(Salary and Dividend) Specialist Lenders(Salary and net profit before tax)
Income calculation Average of 3 years£25,000 x 4.5 Most recent years figure£35,000 x 4.5
Total lending £112,500 £157,500

As you can see, finding the right lender can have a big impact on the maximum loan size, so speaking to a specialist who can help you get the best mortgage to income ratio can make a huge difference to your plans.

Newly Self Employed Mortgage Income Multiples

Whether sole trader, partnership or limited company, most high street lenders require 2-3 years full trading accounts before they’ll look at granting you a mortgage. However, those with their first full years trading can still be approved so long as the business is profitable and the income can be evidenced – either through a full years certified accounts or SA302’s (often lenders will want both when only having traded for 12 months).

The maximum income multiples lenders consider for new businesses tends to be the same as for established businesses, at between 4-5x income. However, there are fewer lenders considering businesses trading for 12 months so getting the highest loan size can be more difficult. Lenders still consider either net profits for sole traders and partnerships, and salary, dividends, or retained profits for company directors.

Other Income

Many lenders require you to be earning more stable / typical income in order to take “other” income types into account – For instance, the majority of lenders will only accept tax credits for those who also have an earned income. Most will also cap the “other” income to the level of the earned income, i.e. only accepting £10k of a £15k tax credit if earning a salary of £10k.

Income types that usually need to be accompanied by earned income:

  • Child Benefit
  • Child Tax Credit
  • Maintenance Payments
  • Working Tax Credit

Other Income types considered without any other earned income, in their own right:

  • Disability Living Allowance
  • Pension income
  • Investment Income
  • Overseas earned income
  • Rental Income
  • Bursary
  • Stipend

Typically, the type of other income depends on how much of it the lenders will consider, and thus how much impact they can make to your maximum affordable loan. Generally, if the income is permanent and sustainable then lenders will consider 100%, and if variable or not-guaranteed to be paid for the length of the term of the mortgage, then lenders will consider less than 100%.

Impact of Number of Applicants on Affordability

The majority of applications are for 1 or 2 people looking to buy together, however we are seeing an increasing number of enquiries from families looking at using 3 or 4 salaries as part of their application.

Most lenders limit the number of applicants to 2, so having anyone else with additional income in the household on the mortgage would make no difference to affordability or maximum loan size.

That said, there are some mortgage lenders that consider incomes from up to 4 applicants on a single mortgage (and incredibly not all of the applicants have to actually live in the mortgaged property), of course giving a much higher income to mortgage ratio and maximum loan.

Impact of Credit Commitments on Affordability

Which commitments reduce the amount you can borrow?

Put simply, each credit commitment you have reduces the amount you can borrow. Old-school mortgage income multiple calculators will usually annualise the monthly commitment and deduct this from your income and modern affordability model calculators will deduct an amount from your disposable income, before calculating the maximum loan.

For instance, if you had a loan for £250 a month it would be considered a £3000 annual commitment, which would reduce ‘usable’ income for a client on £25000 down to £22,000. If the lender was offering a 4.5x income multiple, then the maximum loan would be 22,000 x 4.5 = £99,000, where the same £25,000 salary with no loan would offer a maximum of £112,500.

The same calculations would apply for other commitments such as maintenance or other mortgage payments, whereas credit cards are often treated differently with some lenders deducting an amount based on 2.5% of the balance, some 5% and others using the amount you repay. Borrowers who clear their balance every month, or plan to clear it all before completion, can have the commitment ignored (so long as they can evidence they have the funds to do so).

Which commitments do lenders ignore?

Some lenders ignore certain commitments that are either considered a day to day expense or aren’t long-term enough to have an effect on the mortgage. Some examples:

  • Mobile Phones – these often appear on credit reports as a commitment because they are considered a contract for credit, however these tend to be considered a variable expense in the same way as gas/electric and are added into calculations for the general cost of daily living rather than a physical commitment.
  • Loans/finance/cards that will be redeemed before completion – Often along with the sale of a property clients will clear their credit commitments before moving into their new property, and in these cases lenders can ignore the monthly repayments, which in turn increases the amount they’d be prepared to lend. Lenders will make this a condition of the mortgage offer, and many will ask the solicitors to confirm these have been repaid before completion, however this isn’t always a mandatory requirement with every lender.
  • Loans with less than 6 months to run – When lenders perform a credit check they will see the monthly payments and balance of any outstanding finance commitment therefore confirming the term left.  With a mortgage/house purchase typically taking 2-3 months any loan in place after completion should quickly be repaid and so can be ignored by some lenders
  • Self-Funding Buy To Lets – there are many landlords and people with buy to let mortgages on properties they rent out in the background, and in certain circumstances these can impact affordability calculations. Generally, as long as the rent received covers the mortgage payment lenders will ignore the commitment. Some stipulate that the rent must be over and above the mortgage payment by a certain % (for instance 125% would require £625pm rent to cover a £500pm payment) to cover the risk of rental void periods (when the property is empty) and/or other costs associated with letting the property i.e. agent’s fees/maintenance etc.

Does having children affect your mortgage Application?

As any parent knows, children cost money. Not just from the basics like food and clothing, but to things like activities, kid’s clubs, holidays, and in particular – childcare costs, which can often be hundreds of pounds each month. In general, lenders will consider children as an expense and factor the number of children you have into affordability calculations, the more you have the less you can afford to spend on the mortgage.

Some lenders are more accommodating to the number and age of children in the family, some ignoring them altogether, whereas others can decline applications due to the number of children compared to household income, even when standard income multiples would suggest the loan applied for is affordable.

Impact of other Financial Dependents on Affordability

It’s not just children (i.e. dependents under 18) living with parents that can be considered as financial dependents, and lenders usually ask if there are any other financial dependents living in the property. This could be an older child who has not moved out, a parent, relative or dependent spouse/partner – each person who resides in the property and doesn’t have their own income is likely to cost the owner money, and this therefore will impact mortgage affordability.

It’s not always practical for those looking for a joint mortgage to actually apply together (for instance if one party has adverse credit, is named on another mortgage, has visa issues, or is older than acceptable age), and in these scenarios the maximum loan may be higher with a lender who will accept just the one party applying. When married, most lenders require it to be a joint application, however there are several lenders considering married sole applicants. Further issues arise of course, when the deposit is coming from the party not named on the mortgage, as lenders and solicitors require evidence for the source of finds and that the unnamed resident has no rights to title should the borrower default.

Impact of Deposit and Loan To Value (LTV) on Affordability

Those who have a larger % deposit are deemed lower risk to the lender, and thus are often afforded a larger salary multiple. With a small deposit of say 5%, there’s only a small number of lenders offering mortgage borrowing up to 5 times salary, whereas those with larger deposits will have a wider range of lenders and deals to choose from, and are thus more likely to be accepted.

Impact of the length of your mortgage term on Affordability

The majority of mortgages are taken on a repayment basis (i.e. the balance is slowly reduced with your monthly payments), and capital repayments are factored into your monthly instalments. Therefore, the period you choose to pay it back over will impact how much each monthly payment costs, of course repaying £200k over 10 years is going to cost more per month than repaying over 20 years. This is why they term you choose will have an impact on the amount a lender is prepared to lend, especially when terms are shorter. If you need to borrow more than offered at 20 years, your advisor should look to extend the mortgage term to lower the monthly repayments, which (provided it doesn’t stretch beyond your retirement age) should improve affordability and thus increase your maximum loan size.

Impact of credit history on Affordability

For people with adverse credit, lenders tend to be more cautious with the amount they’re prepared to offer. The number and type of credit issues, £ amount of the issue, the date of the event, and whether or not it was repaid, all have an effect on the amount you’re able to borrow.

It is possible to obtain a mortgage with the following credit issues, even if they were recently registered, up to high loan to values:

For more info on eligibility with each of these issues, please see our bad credit mortgages section here.

Mortgage income multiples for people with adverse credit is one of the most complex situations specialist brokers come across, as every lender is different in what they do and don’t accept. Maximum loans are more difficult to obtain because income differences alongside credit issues can really narrow down which lenders are likely to consider you. For this reason, we recommend making an enquiry and speaking to one of the experts.

Mortgage affordability on secured loans

If you are looking to borrow more money against the equity in your home, and require over 5x your income, then a secured loan may be the thing. Secured loans are the exception to the 5x income rule, as they are underwritten with very different criteria, and affordability is assessed in a different way. Borrowers are at times able to obtain up to and in excess of 10x income in the right circumstances, so don’t write it off if this applies to you – make an enquiry.

For more info on secured loans click here

If you’re ready to make an enquiry please fill out our quick form below and a mortgage expert will be in touch ASAP. If you require immediate assistance please give us a call.

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