Why Can Two Mortgage Lenders Offer Completely Different Affordability?

You can give two mortgage lenders exactly the same income, deposit and financial commitments and receive two very different answers about how much you can borrow.

That often surprises borrowers.

There is no single UK mortgage affordability calculation used by every lender. Each lender applies its own affordability model, lending policy and interpretation of income and expenditure.

For straightforward PAYE applicants the differences may be relatively small.

For self-employed applicants, company directors, people with variable income or households with significant commitments, the difference can sometimes be substantial.

Affordability Is More Than an Income Multiple

People often hear phrases such as:

"Banks lend four-and-a-half times your income."

That can be a useful rough guide, but it is not how mortgage affordability ultimately works.

A lender may consider:

• Basic salary
• Overtime
• Bonuses
• Commission
• Second-job income
• Self-employed profit
• Salary and dividends
• Company profit
• Pension contributions
• Loans
• Credit cards
• Childcare
• Maintenance commitments
• Dependants
• Student loans
• Mortgage term
• Applicant age
• Loan-to-value
• Expected mortgage payment
• Interest-rate stress assumptions

Two lenders can therefore start with the same household income but reach different conclusions.

How Income Treatment Can Change the Answer

Imagine a company director receives:

• £15,000 salary
• £25,000 dividends

and the company also retains additional profit.

One lender may assess the applicant using salary plus dividends.

Another may have criteria that allow it to consider salary plus an appropriate share of company profit.

The borrower has not suddenly started earning more.

The lenders are simply using different methods to assess the same underlying circumstances.

The same issue can arise with:

• Overtime
• Bonuses
• Commission
• Contractor income
• Multiple jobs
• Self-employed income
• Recently increased earnings

Household Commitments Matter Too

Income is only one side of affordability.

Lenders also assess expenditure and financial commitments.

For example, one lender may treat a particular credit-card balance differently from another.

Childcare costs, dependants, personal loans and other committed expenditure can also have different effects within different affordability models.

That is one reason online calculators from different lenders can return different maximum loans.

Mortgage Term Can Affect Affordability

A longer mortgage term can sometimes reduce the calculated monthly payment and therefore affect affordability.

However, extending the term means the mortgage may remain outstanding for longer and could increase the total interest paid.

A longer term should therefore not simply be used as a way of forcing a case through an affordability calculation.

The mortgage still needs to be appropriate for the borrower.

Loan-to-Value Can Make a Difference

The amount of deposit can also influence lender appetite.

A borrower requiring a mortgage at a lower loan-to-value may sometimes have access to different affordability rules or product options than someone borrowing at a higher loan-to-value.

Again, lender policy varies.

Why Generic Online Calculators Have Limitations

Online affordability calculators are useful for obtaining an indication.

They are not necessarily capable of interpreting complex circumstances.

A calculator may not properly account for:

• A recent salary increase
• Rising self-employed income
• Retained company profits
• Multiple sources of income
• Unusual bonus structures
• Future repayment of existing commitments
• Complex property transactions

Where circumstances fall outside the standard boxes, lender research becomes more important.

What Should You Do If a Lender Will Not Offer Enough?

Avoid making applications to several lenders simply to see whether somebody produces a larger number.

Repeated applications can create unnecessary credit searches and still fail to address the underlying issue.

A better approach is to establish:

1. Which income is available.
2. How it can be evidenced.
3. Which commitments affect affordability.
4. The required mortgage.
5. The proposed loan-to-value.
6. Which lenders' affordability methods appear compatible with the circumstances.

Sometimes another lender may provide a legitimate route.

Sometimes the required borrowing simply is not affordable at present.

In that situation, useful alternatives might include:

• Increasing the deposit
• Reducing the purchase price
• Repaying existing commitments
• Waiting for additional income history
• Extending the mortgage term where appropriate
• Restructuring the proposed transaction