Recent research by financial information provider, Moneyfacts, has found that five of the top 10 mortgage lenders now use ability to repay in preference to income multiples in determining the amount they are prepared to lend.

In an ability to repay application, each case will be individually approved by way of an income and expenditure assessment, taking account of existing credit agreements, mortgage payments and contractual commitments. Many lenders will calculate a debt income ratio, which as a rule of thumb should not exceed 40%.

As affordability models are based on a score card principle, each lender may use slightly different criteria, which could vary, dependent on their current attitude to risk. With this unknown formula, the market becomes less transparent.

This could in turn lead to borrowers completing a credit application on initial enquiry, which may in turn be declined. And every time this happens a footprint remains on their credit record.

Although many lenders still use income multiples, they are becoming much more sophisticated. Over 60 lenders have both their standard income multiples, plus a set of enhanced multiples. These will offer higher multiples for those on larger salaries, borrowing at a lower LTV or in a professional occupation.

The majority of lenders will now also consider cases of more than two applicants, mostly allowing up to four borrowers. But don't assume that all four salaries are taken into account. While some lenders will allow this, the income multiple may be lower, and others will only take account the two highest salaries.

Your home may be repossessed if you do not keep up repayments on your mortgage.
Article date: 10.06