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Mortgage Income and affordability
This might seem obvious but, when people are worried about the state of their credit and are wanting to apply for a bad credit mortgage or an adverse credit mortgage - how much they can borrow (or what is affordable) can sometimes be overlooked by the borrower.
We have listed below the main ways in which a lender will work out what they deem as affordable.
Lenders work out who can afford what in various different ways, however they will use similar methods to the ones described below - we would 
suggest speaking to a specialist broker prior to applying for a mortgage to ensure any new mortgage is truly affordable based on your individual circumstances.
Income Multiple:
You are probably familiar with this, the lender takes your annual salary, multiplies it by a number (depending on lender) and they will lend up to that amount
For example…
3x income multiplier - annual salary of £30,000, times this by 3 gives £90,000 – this is the total amount the lender would be prepared to lend.
Mortgage to Income Ratio (MTI):
The lender works out your monthly income, takes a percentage of this (the % will depend on the lender) to cover the mortgage payments:
For example…
The lender works on an MTI of 30% - they will take your monthly income and take 30% of that, as long as your new mortgage payment does not amount to more than the 30% they deem it affordable.
Debt to Income Ratio (DTI):
The lender will allow a certain % (set by the lender) of your total monthly income to cover all creditor and priority debts, including the new mortgage payment. If your total debts do not amount to more than this they will deem it affordable
For example…
If you earn £50,000 per year and the lenders DTI is 40% of your monthly income - approximately £1666.00 - the lender will deem the mortgage affordable as long as the monthly cost of all your debts, including the new mortgage payment, do not exceed £1666.00
Affordability Calculation
The lender looks at what you have coming in (wages, tax credits etc) on a monthly basis and then looks at what you have going out (what you spend each month) including living costs, council tax, food etc.
They then do a calculation (which could be as simple as subtracting your outgoings from your income) and if the income covers the outgoings (dependent on what the individual lender will allow) the mortgage is deemed affordable.
The majority of lenders use one or a combination of the above to work out if a new mortgage is to be deemed affordable - the main thing to consider, even if the lender deems a mortgage to be affordable, is that you are happy with any new payments and you are certain they're affordable to you.
Or professional mortgage brokers will take all relevant factors into account, such as the lenders views, your views, market conditions, including the possibility of future interest movements and any possible changes which may occur to your personal finances before making our recommendation.
Bad credit mortgages and bad credit remortgage's need much more scrutiny than a ‘normal mortgage’ due to the financial issues people deal with every day when, usually through no fault of their own things have gone wrong - we would strongly recommend using only a bad credit mortgage specialist.
It is sometimes the case that any new mortgage or remortgage will run alongside existing bad debt, setting up the payments and ensuring existing commitments can still be met is obviously very important.
- contact us today
When making any recommendation, our specialist bad credit mortgage brokers will look at the package as a whole, what can it do for you, your family and your finances, long term as well as short term, only after we have discussed all these factors in detail will we decide on a best way forward - with straight forward, no nonsense advice that works.
