Articles > How Much Can I Borrow?
(7 Jan 2008)
Different lenders have different methods for calculating how much a potential client can borrow. At one time, it was as simple as 3 times joint income. As lenders contiue to find new ways to assess affordability, this basic formula (for most lenders anyhow) has evolved into a sophisticated calulation.
Multiples - Some lenders have stuck to lower multiples of 3 or 3.5 times salary, but a number have pushed the boat out to 4 or 4.5 times joint salary, or even 5 times salary for a single applicant with no debts.
If you earn a bonus, commissions or even overtime, most lenders will take into account 50% of this amount and ad it to your base salary.
Debts - Any personal debts that you have (credit cards, bank loans or car loans) will act to deflate your salary.
For example, if your monthly spend on personal debts is £200, your annual spend will therefore be £2,400. If you salary is £25,000, the £2,400 will be subtracted from your salary before multiplying. Your usable salary would therefore be £22,600.
Personal loans will be taken at face value, but most lenders will have special calculations for credit cards. For example, a lender might assume that your monthly credit payment is 3% of the outstanding balance, even if you have an interest-free deal and pay less than that.
Credit rating - Some lenders have a pass or fail system. If you pass, the loan is approved. If you fail you do not.
Other lenders, however, have a tiered pass system. For example they might have an 'A' pass, a 'B' pass or a 'C' pass. The one you get will determine not only the rate that the lender may be pepared to offer you, but also the amount that the lender is willing to advance you.
Ask your lender of choice specifically how their calculation is done. You may learn how to improve your odds. If you found this article interesting or useful please share it with others!