Double your mortgage in minutes

A new method to calculate how much a home-buyer can borrow has winners and losers, writes Stephen Pritchard

This is what a growing number of banks are now willing to do thanks to a new way of calculating how much a home-buyer can borrow. Instead of using the salary multiples that mortgage companies have relied on for decades, lenders are increasingly using a system known as affordability-based lending. The potential benefits - for some buyers, at least - are significant.

Alliance & Leicester announced that it would move from salary multiples to affordability last week. The bank commissioned the Centre for Economics and Business Research (CEBR) to study the differences between affordability and conventional salary multiples. The full research is being kept private, but the bank has issued some key findings, which make for interesting reading. Based on average incomes, average house prices - around £155,000 - and a nominal mortgage rate of 6.5 per cent, a single person without children could borrow £124,316, up some £23,500 from the four-times salary multiple used by most banks and building societies.

Craig Calder, senior product manager at Alliance & Leicester, says that the difference could be enough to help hard-pressed, first-time buyers on to the property ladder. And although borrowing more could entail a greater risk, Calder argues that affordability-based lending is more responsible than using simple salary multiples. Fixed outgoings, from loan repayments to the costs of raising children, are taken into account, and mortgage offers more closely match individuals' circumstances. "We are not in the market for risky lending and believe this is the way to go," he says.

The changes also mean that the bank can allow for the fact that people in areas of expensive housing, such as London and the South-east, will be prepared to sacrifice other spending in order to cover the mortgage. And although some living costs will be higher in dearer areas, not all costs track house prices so closely. As people in London and the South-east tend to earn more than those in other parts of the UK, they also have more money to spend on the mortgage.

Some buyers, though, will lose out under affordability. Chief among these, CEBR found, are single parents. Once their outgoings are taken into account, they will be able to borrow almost £13,000 less. But a couple with children and one income will be better off.

Other losers will be those with significant debts, including recent graduates. Alliance & Leicester takes debt repayments into account when it calculates mortgage cover. This even applies to interest-free loans - someone with loan repayments of £200 a month and a credit card debt of £3,000 would be able to borrow £46,000 less.

The greatest beneficiaries, on the other hand, are dual-income households. Arguably these - especially double-income, no-kids families - have suffered most from the arbitrary nature of salary-based lending. The CEBR research assumed a four-times salary multiple for single-buyers and a three-times multiple for joint applicants, and some lenders are even more conservative than that. Yet many of a household's costs are fairly fixed, regardless of whether there are one or two wage-earners.

A two-income couple without children, on average incomes, could borrow an extra £109,000; a couple with children could borrow £91,500 more. But just because a lender will offer a larger mortgage does not mean it is always a good idea to take it up. Buyers might want to keep their mortgage under the threshold for mortgage indemnity premiums, or where higher interest rates kick in. This is generally for loans of 90 per cent or more of the house.

And, as Anna Bowes of financial advisers Chase de Vere cautions, maximum lending limits are just that - a cautious home-buyer might want to allow some headroom for interest rate increases or other unpredictable costs. "Buyers have to be honest with themselves, as well as with the lender, about what they can afford," she says.

PROMOTED VIDEO
Sport
David Moyes gets soaked
sport Moyes becomes latest manager to take part in the ALS challenge
Life and Style
techCould new invention save millions in healthcare bills?
News
peopleEnglishman managed quintessential Hollywood restaurant Chasen's
Life and Style
food + drinkHarrods launches gourmet food qualification for staff
Arts and Entertainment
Michael Flatley prepares to bid farewell to the West End stage
danceMichael Flatley hits West End for last time alongside Team GB World champion Alice Upcott
News
Members and supporters of the lesbian, gay, bisexual, transgender (LGBT) community walk with a rainbow flag during a rally in July
i100
Voices
Mosul dam was retaken with the help of the US
voicesRobert Fisk: Barack Obama is following the jihadists’ script
Life and Style
Black Ivory Coffee is made using beans plucked from elephants' waste after ingested by the animals
food + drinkFirm says it has created the "rarest" coffee in the world
Arts and Entertainment
Jamie T plays live in 2007 before going on hiatus from 2010
arts + entsSinger-songwriter will perform on the Festival Republic Stage
Life and Style
food + drinkThese simple recipes will have you refreshed within minutes
News
Jermain Defoe got loads of custard
i100
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Business Analyst - Banking - London - £550 - £650

    £550 - £650 per day: Orgtel: Business Analyst - Traded Credit Risk - Investmen...

    Data Centre Engineer - Linux, Redhat, Solaris, SAN, Puppet

    £55000 per annum: Harrington Starr: A financial software vendor at the forefro...

    .NET Developer

    £600 per day: Harrington Starr: .NET Developer C#, WPF,BLL, MSMQ, SQL, GIT, SQ...

    Data Centre Engineer - Linux / Redhat / Solaris / Puppet / SAN

    £65000 per annum: Harrington Starr: A financial software vendor at the forefro...

    Day In a Page

    All this talk of an ‘apocalyptic’ threat is simply childish

    Robert Fisk: All this talk of an ‘apocalyptic’ threat is simply childish

    Chuck Hagel and Martin Dempsey were pure Hollywood. They only needed Tom Cruise
    Mafia Dons: is the Camorra in control of the Granite City?

    Mafia Dons: is the Camorra in control of the Granite City?

    So claims an EU report which points to the Italian Mob’s alleged grip on everything from public works to property
    Emmys look set to overhaul the Oscars as Hollywood’s prize draw

    Emmys look set to overhaul the Oscars as Hollywood’s prize draw

    Once the poor relation, the awards show now has the top stars and boasts the best drama
    French connection: After 1,300 years, there’s a bridge to Mont Saint-Michel

    French connection: After 1,300 years, there’s a bridge to Mont Saint-Michel

    The ugly causeway is being dismantled, an elegant connection erected in its place. So everyone’s happy, right?
    Radio 1 to hire 'YouTube-famous' vloggers to broadcast online

    Radio 1’s new top ten

    The ‘vloggers’ signed up to find twentysomething audience
    David Abraham: Big ideas for the small screen

    David Abraham: Big ideas for the small screen

    A blistering attack on US influence on British television has lifted the savvy head of Channel 4 out of the shadows
    Air strikes? Talk of God? Obama is following the jihadists’ script

    Air strikes? Talk of God? Obama is following the jihadists’ script

    The President came the nearest he has come yet to rivalling George W Bush’s gormless reaction to 9/11 , says Robert Fisk
    Ebola outbreak: Billy Graham’s son declares righteous war on the virus

    Billy Graham’s son declares righteous war on Ebola

    A Christian charity’s efforts to save missionaries trapped in Africa by the crisis have been justifiably praised. But doubts remain about its evangelical motives
    Jeremy Clarkson 'does not see a problem' with his racist language on Top Gear, says BBC

    Not even Jeremy Clarkson is bigger than the BBC, says TV boss

    Corporation’s head of television confirms ‘Top Gear’ host was warned about racist language
    Nick Clegg the movie: Channel 4 to air Coalition drama showing Lib Dem leader's rise

    Nick Clegg the movie

    Channel 4 to air Coalition drama showing Lib Dem leader's rise
    Philip Larkin: Misogynist, racist, miserable? Or caring, playful man who lived for others?

    Philip Larkin: What will survive of him?

    Larkin's reputation has taken a knocking. But a new book by James Booth argues that the poet was affectionate, witty, entertaining and kind, as hitherto unseen letters, sketches and 'selfies' reveal
    Madame Tussauds has shown off its Beyoncé waxwork in Regent's Park - but why is the tourist attraction still pulling in the crowds?

    Waxing lyrical

    Madame Tussauds has shown off its Beyoncé waxwork in Regent's Park - but why is the tourist attraction still pulling in the crowds?
    Texas forensic astronomer finally pinpoints the exact birth of impressionism

    Revealed (to the minute)

    The precise time when impressionism was born
    From slow-roasted to sugar-cured: how to make the most of the British tomato season

    Make the most of British tomatoes

    The British crop is at its tastiest and most abundant. Sudi Pigott shares her favourite recipes
    10 best men's skincare products

    Face it: 10 best men's skincare products

    Oscar Quine cleanses, tones and moisturises to find skin-savers blokes will be proud to display on the bathroom shelf