How is your mortgage lendability calculated?

How much I can borrow is probably the first question any applicant will ask a mortgage broker when applying. More often then not the question isn’t answered with a definitive answer until a few questions are answered such as:

How much you earn

Your earnings are the first port of call when looking at how much you can borrow for a mortgage. This is because as any financial institutions such as a mortgage broker needs to get a fair understanding on how realistic the applicant is to paying back each month without default. Underwriters who approve the mortgage need to assess the risk involved with any applicant.

The borrowing amount can vary from applicant to applicant, also from country to country. In the United Kingdom for example you can borrow up to 4 times your earning and Australia normally 5 times you’re earning is acceptable risk for financial institutions.

What deposit you are putting down

Deposits are critical to applications. Financial institutions need to know the risk the applicant is putting down to make an accurate decision on what they are comfortable on lending. As a rule the more you put down as a percentage the more likely you will be approved. The percentage of mortgage against deposit is called Loan to Value or LTV.

The true value of the property

There are cases when you have found a dream home and paid over the odds just to secure the dream property which is fine if this is where you want to live forever, however banks will also value your property and if they deem the property over valued and the LTV is hovering around 90-95% chances are the banks will be reluctant to borrow.

Any previous debt problems

If you hold several credit cards or have a car loan which is unpaid, financial institutions will take this into effect when assessing your lendability. Financial institutions frown upon unpaid debt and see the inability to pay off debt as a risk in any mortgage application.

In short how much you can borrow is quite subjective and varies from applicant to applicant, the best way to definitely secure a mortgage is to build up a big deposit and ensure the LTV is low.