How much can you borrow?

Christina Jordan
by Lovemoney Staff Christina Jordan on 09 March 2009  |  Comments 0 comments

Which lenders will offer the most when it comes to your mortgage?

You have a lot of decisions to make when it comes to choosing a mortgage. Do you want a fixed or variable rate? Which lenders have low upfront costs? Which offers the most flexibility?

It's nice to have these choices, but the fact of the matter is that for many borrowers, especially first-time buyers, it actually comes down to who will lend you the most money.

And in the current mortgage market this reality becomes even more acute. Two years ago lenders were generous with the amounts they would offer, and getting the required mortgage was not too much of a problem, unless you were looking to buy in the most expensive areas of the UK.

How times have changed. Now, many buyers do not have the luxury of choosing the best rate or deciding which deal will suit them. They are simply hoping to find a lender who will offer them enough to buy the home they want. And this is still difficult, despite falling house prices making homeownership more accessible to many.

Affordability gap

Mortgage affordability comes down to two main issues -- the size of your deposit and the size of your income.

Lenders have massively restricted the former so that those with less than 10% will struggle to find a mortgage at all, let alone a decent rate.

This imposes some tight maximum borrowing levels, regardless of your income.

For example, if you are a first-time buyer with a £10,000 deposit, the maximum you can bforrow is £90,000, which is 90% loan to value (LTV). And this is the case whether you earn £30,000 or £70,000 a year. If you have £20,000 upfront you could borrow a maximum of £180,000 (90% LTV) and so on.

That is the first restriction, and within that, lenders are also very careful with the affordability criteria they use.

When looking at your income, they will take into account your outgoings and existing borrowing commitments. For example, they will ask for information about your outstanding monthly repayments on loans and credit cards, or consider the number of children you have (because you are financially responsible for their welfare). Based on this information, they use complex criteria to work out what they think you can afford each month -- and therefore the maximum they will lend to you.

But still, lenders differ significantly when it comes to this criteria. Finding the most generous lender could make the difference between you being able to afford a property in your area and being priced out of the market altogether.

Choose wisely

For example, a first-time buyer earning £25,000 with a £50,000 deposit can only borrow up to a maximum of £87,000 with HSBC, but up to £125,000 with Woolwich -- a 43% larger mortgage. Clearly this could make the difference for many borrowers between getting the property they want and missing out entirely.

Taking an example of joint buyers with a total income of £70,000 (one income of £40,000 and one of £30,000), again borrowing at 75% LTV, Cheltenham & Gloucester (C&G) would lend up to £385,000, whereas First Direct will only offer a maximum mortgage of £192,000 -- half as much!!

A high-earning single borrower would find similar discrepancies when looking for a homeloan. For example, the maximum a first-time buyer earning £60,000 could borrow from HSBC and First Direct is £210,000. However, Halifax and Woolwich would be prepared to lend up to £300,000, while C&G would offer up to £320,000 -- a huge difference.

These calculations, and those in the tables below, are not based on full mortgage offers but represent the maximum that the lenders would be prepared to offer, assuming the borrower met all other criteria -- but the difference is still staggering.

When you come to making a full application, all of your individual circumstances will be taken into consideration and it might be that the lender will actually offer you less that the maximum they initially quoted. But still, it's worth knowing that their maximum figures are startlingly different.

Who is the most generous?

From the eight large lenders I checked, Halifax, Cheltenham & Gloucester (C&G) and Woolwich were prepared to lend the most overall based on income. First Direct, HSBC and Yorkshire Building Society would lend the least.

This is particularly interesting as HSBC and First Direct are among the most competitive lenders in the market at the moment, with extremely attractive rates. For example, HSBC has a two year fixed rate at 2.89% for those with a 40% deposit and First Direct's Offset Base Rate tracker is also just 2.89%, available to those with a 25% deposit.

Clearly, HSBC and First Direct are out to attract low-risk borrowers that have not overstretched themselves in order to get their mortgages. This is no doubt frustrating for borrowers who have the required deposit but do not have a large enough income to meet the lenders' criteria. On the other hand, I think it's great that First Direct and HSBC are lending responsibly and ensuring that their back book has very little chance of incurring arrears. Good for them.

So who offered what?

I chose the lenders below based on a mixture of the biggest UK lenders and those with the most appealing best buy deals, which are likely to attract the attention of borrowers.

In the examples below I entered that the borrower/s have no dependants and no monthly loans or credit card payments, where the information was asked for. I also entered the loan-to-value amounts or actual deposit amounts listed, again where the information was required.

The single modest earner

The single modest earner has an income of £25,000 but a substantial deposit of £50,000 and only needs to borrow at 60% LTV.

Lender

Maximum they would lend

Yorkshire Building Society

£75,000

HSBC

£87,000

First Direct

£87,500

Abbey

£95,000

Nationwide

£102,500

C&G

116,000

Halifax

£122,700

Woolwich

£125,000

 

The joint buyers with decent salaries

The joint buyers have a total income of £70,000, with one borrower earning £40,000 and the other £30,000. They are looking to borrow 75% of the property's value (or have a £50,000 deposit)

Lender

Maximum they would lend

Yorkshire Building Society

£280,000

HSBC

£245,000

First Direct

£192,500

Abbey

£294,000

Nationwide

£287,000

C&G

£385,000

Halifax

£315,000

Woolwich

£350,000

The high earning single buyer

This single buyer has earning of £60,000 and needs to borrow at 75% LTV (or has a £50,000 deposit)

Lender

Maximum they would lend

Yorkshire Building Society

£240,000

HSBC

£210,000

First Direct

£210,000

Abbey

£258,000

Nationwide

£246,000

C&G

£320,000

Halifax

£300,000

Woolwich

£300,000

Compare mortgages at lovemoney.com

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