New to Mortgages? Understanding “Income Multiples”

If you’re new to mortgages, you’ve probably come across the term “income multiple.” At first, it might sound confusing, but it’s actually a straightforward concept that plays a big role in determining how much you can borrow for your home in the UK. 

What Is an Income Multiple?

An income multiple is simply a number that lenders use to calculate how much they’re willing to lend based on your annual income. Most UK mortgage lenders use income multiples as part of their affordability assessment.

For example, if a lender offers an income multiple of 4.5 and you earn £30,000 per year, the maximum they might lend you is 4.5 times your salary — or £135,000.

How Lenders Use Income Multiples

Lenders consider income multiples to ensure borrowers don’t take on more debt than they can afford to repay. While income multiple is a key factor, lenders will also look at other aspects of your financial situation, such as:

- Your credit score
- Monthly outgoings (e.g., bills, debts, lifestyle expenses)
- Other financial commitments (e.g., car loans, student loans)

Income multiples provide a simple guide to help you understand what’s possible, but it’s not the only thing a lender will look at.

Examples of Income Multiple Calculations

Let’s break this down with a few examples.

Example 1: Single Applicant

- Annual Salary: £40,000
- Income Multiple: 4.5

In this case, the calculation would be:

£40,000 x 4.5 = £180,000

This means you could potentially borrow £180,000 for your mortgage.

Example 2: Joint Applicants

For couples or joint applicants, lenders will look at the combined income. 

- Applicant 1’s Salary: £35,000
- Applicant 2’s Salary: £25,000
- Combined Income: £60,000
- Income Multiple: 4.5

Here, the calculation would be:

£60,000 x 4.5 = £270,000

So, you and your partner could potentially borrow £270,000 based on this income multiple.

Typical Income Multiples in the UK

Most UK lenders offer income multiples between 3.5 to 5.5 times your income. The exact number you’ll be offered depends on your financial circumstances, including how secure your income is and whether you have a good credit history.

Some examples of common income multiples:

- Standard Applicants: 4-4.5 times your income
- High Earners: Some lenders may offer up to 5 or 5.5 times the income for higher earners (typically over £80,000 annually)

Other Factors That Affect How Much You Can Borrow

Income multiples are just the starting point. Here are a few other things lenders consider when deciding your mortgage amount:

- Affordability checks: Lenders assess your monthly income against your outgoings (including any debts) to ensure you can afford the mortgage repayments.
- Loan-to-Value Ratio (LTV): This refers to the size of the mortgage compared to the value of the property. The higher your deposit, the lower the LTV, which can improve your chances of borrowing more.
- Interest Rates: Lenders will also stress-test your ability to afford mortgage repayments if interest rates rise, especially if you’re on a variable-rate mortgage.

How to Boost Your Borrowing Potential

If your current income multiple doesn’t quite match your borrowing goals, here are a few tips to potentially boost what you can borrow:

1. Increase Your Deposit: The larger the deposit, the better your mortgage terms, and this could improve your borrowing power.
2. Reduce Debts: Pay down any existing debts to improve your affordability score with lenders.
3. Improve Your Credit Score: A higher credit score shows lenders that you’re a responsible borrower, potentially allowing you to borrow more.
4. Consider Joint Applications: Applying with a partner or family member can combine incomes, boosting your borrowing potential.

Conclusion

While “income multiple” might sound confusing at first, it’s simply a way for lenders to calculate how much you can borrow based on your income. By understanding how these calculations work and the factors that influence them, you’ll be better equipped to navigate the mortgage application process in the UK.

If you’re looking to buy a home and need advice on how much you can borrow, speaking to a mortgage broker or lender directly is always a smart move. They can offer tailored advice based on your specific financial situation.