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How much can I borrow on a mortgage based on my salary?

 How much can I borrow on a mortgage based on my salary?
Generally speaking, banks and building societies will lend up to four-and-a-half times your total income. Photo: Getty (Alexander Spatari via Getty Images)

If affording your dream home feels like a bit of a stretch, it may be welcome news that a trickle of lenders are now agreeing to grant borrowers a mortgage of 5.5 times their income.

But before you get too excited about being able to get a whopping great home loan, it’s important to understand the terms and conditions, as these deals are being reserved for higher earners.

Mortgages of this size are also not available at a particularly high loan-to-value (LTV), meaning you’ll need a sizeable deposit to qualify.

Here we take a closer look.

What is changing?

Generally speaking, banks and building societies will lend up to four-and-a-half times your total income — combined with that of anyone you’re buying with.

According to consumer group Which?, if your total household income is £60,000 ($80,975) a year, you might be offered up to £270,000.

However, in recent weeks, we’ve seen some movement on this.

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Halifax recently changed some of the loan-to-income (LTI) limits applied to its affordability. For loans up to £1m, at up to 75% LTV (meaning a minimum deposit of 25%), the maximum LTI is being increased from five times income to 5.5.

Elsewhere, HSBC (HSBA.L) is also now allowing applicants to borrow 5.5 times their salary.

What’s the catch?

While this may sound like a big positive, you will only qualify for these more generous offers from Halifax if you have an income of more than £75,000 per year.

HSBC also reserves its big home loans for wealthy buyers.

Andrew Montlake from mortgage broker Coreco, said: “It’s true that some lenders reserve the largest income multiples for those borrowers with higher incomes. Lenders perceive that these individuals are more likely to be able to cope with interest rate changes — and also have a higher propensity to repay the loan more quickly. They are therefore seen overall as a lower risk.”

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Mark Harris from SPF Private Clients, another mortgage broker, added: “Higher LTI ratios are also possible for those who work in vocations where it is expected their income will rise significantly as they progress through their careers, especially in professional roles such as doctors and accountants.”

Is there a danger of a return to irresponsible lending practices?

In the past, lenders offering jumbo-sized loan deals have been criticised for irresponsible lending practices.

But mortgage brokers say they are reasonably relaxed about the changes to income multiples, and not concerned about lenders returning to the free-and-easy lending of the noughties.

Montlake said: “The reality is that all lenders will look on an affordability basis, rather than just on income multiples, with the quoted five or 5.5 times salary being the absolute maximums — rather than an automatic gimme. This is also stress-tested against potential interest rate rises for all those not taking a fixed-rate deal of five years or more.”

This is a view shared by Harris. He said: “It is worth remembering these LTI caps are notional, with each borrower assessed on their affordability, taking income as well as expenditure into account. This is then stress-tested to ensure lending is responsible. In other words, the lender factors in whether the borrower can afford an increase in interest rates, and is not stretching themselves fully at the initial mortgage rate.”

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In addition, lenders are also restricting higher LTIs to those with sizeable deposits. By doing this, banks are taking further measures to reduce risk.

Lenders are beginning to loosen their lending criteria

The good news is, as the UK moves out of initial pandemic restrictions, lenders are feeling more confident about returning to the lending criteria they had previously.

Aaron Strutt from Trinity Financial said: “More lenders are providing more than five times salary mortgages to help borrowers get sufficient mortgages to buy the properties they want.”

This is part of a wider trend of lenders starting to relax their lending rules a little.

Montlake said: “In general, all borrowers are now finding they have more choice — along with the ability to borrow a little bit more — while still being assessed sensibly and prudently. This is a positive for those looking to apply for a mortgage.”

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