Lenders raise the roof on mortgages

Homebuyers should be able to take out bigger mortgages thanks to a new method of calculating how much they can borrow.

In the past, lenders have calculated how much they are prepared to lend by multiplying the borrower's income by a standard factor - typically between three and four times one borrower's salary, or two-and-a-half times joint borrowers' salaries. But Alliance & Leicester has become the latest big lender, joining the Halifax, Nationwide, Abbey and Cheltenham & Gloucester, to work out how much prospective borrowers can afford by analysing their disposable income and outgoings.

Sally Lauder, spokeswoman for A&L, says income multiples were a crude method of working out how much someone might be able to borrow, and they rarely ended up with the amount initially indicated. 'Last week we started giving "quick quotes" based on affordability that are much more bespoke and give an accurate indication of what people will be able to borrow. But in the very near future we will be issuing certificates from our branches that will be valid for 28 days. Homebuyers can show these to estate agents to prove they will be able to access sufficient funds to buy the home they are interested in.'

Simon Tyler of Chase De Vere Mortgage Management says: 'Affordability lending is far more flexible than strict multiples and can result in mortgages of five, six or seven times income, depending on the applicant's income, outgoings and credit rating. Essentially, the more disposable income you have each month and the bigger your deposit, the more you can borrow.'

James Cotton of mortgage brokers London and Country adds that the new 'affordability' method could help struggling first-time buyers to borrow enough to get on the housing ladder. A single person in south-west London on a £25,000 annual salary with no debts and a £20,000 deposit should be able to borrow £123,000 from A&L through the new system, compared to £93,750 through the old income multiples method. Someone earning £50,000 a year could now borrow £237,000, compared to £187,500 through income multiples.

However, those with debts and children fare less well. The single borrower on £25,000 a year with £100 a month loan payments and £1,000 on credit cards would be able to borrow £103,000 through the new method, or £226,000 if his or her salary was bumped up to £50,000. Likewise, a couple with a joint income of £60,000 with no children could borrow £221,000. But a couple with one child could borrow £213,000 and this drops to £205,000 for two children and £197,000 for three, reflecting the cost of children on a family's budget.

Borrowers will also be assessed on postcode, with those living in more expensive areas, such as London, being offered smaller mortgages than those in less expensive places.

Simon Tyler says such borrowers should shop around to see which lender will offer the biggest loan and may do better to stick to lenders still using income multiples. 'If you have outstanding debts and don't earn a great deal, then you may well find that you'll get a larger mortgage if you go to a lender that is prepared to use very big income multiples.'

Melanie Bien of mortgage broker Savills Private Finance says: 'It looks like it should be quick and easy to use this new process as the broker can put the details into a calculator to get an instant response.

'Some calculators are very basic though, with only a quick quote facility, but Alliance & Leicester's new proposition is more progressive and gives a more exact indication of how much an individual can borrow. It means clients know how much they can borrow even before they have chosen their property, which of course makes it easier for them.

'Our brokers would pick a lender offering this flexibility over strict income multiples any time.'

Want to know more?

Alliance & Leicester 0845 3033000

Chase de Vere Mortgage Management 0800 358 0538

London and Country 0800 373300

Savills Private Finance 0870 9007762