Borrow 4.5 times salary? You’ll be lucky…

If you are planning to take out a mortgage any time soon, things are about to get even tougher.

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The Bank  of England’s Financial Policy Committee (FPC) has, this week, announced plans to limit the maximum amount you can borrow when compared your total earnings – something known as a loan-to-income ratio.

The FPC recommended that mortgages which make up more than 4.5 times a person’s salary should comprise of no more than 15% of new lending offered by banks and building societies.

Currently, around 10% of all lending is offered at 4.5 times salary, rising to around 20% in London where house prices are much higher.

So what will the new rules look like? Well, if you are on the UK average annual income of £26,500 (according to figures from the Office for National Statistics) the maximum loan you could be accepted for (at 4.5 times this amount) is £119,250.

But, as part of the top 15% of high loan-to-income applicants, you will also need a secure job, decent-sized deposit, excellent credit score and – more than likely – no other debts.

It’s also been recommended that mortgage lenders apply an interest rate ‘stress test’ to assess if applicants could still afford their repayments if – at any point over the next five years – interest rates rose to 3% higher than when the mortgage was taken out.

For example, if you took a £120,000 base rate tracker mortgage at a rate of 3.5% today, it would cost you £600 a month over 25 years. But if the rate climbed to 6.5%, your repayments would rise to £810 a month.


The Bank of England wants mortgage lenders to be sure borrowers would have room to absorb this increase in their budgets. A consultation has been launched which will be completed by August 31.

The move by the Bank is an attempt to cool an overheated housing market.  House prices have soared by nearly 10% in the UK over the 12 months to May, according to the ONS, while this figure is closer to 19% in the capital.

House prices have soared by nearly 10% in the UK over the 12 months to May, according to the ONS

But the new rules, which are set to come in on October 1, are the second ‘turn of the screw’ in the mortgage market this year.  April 23 saw the arrival of the long-awaited Mortgage Market Review which required lenders to ask more pressing questions about a borrower’s affordability of a loan, including how much they spend on food shopping, gym memberships and even meals out – every month.

You can read more about the MMR in Melanie Wright’s article, Is it now harder to get a mortgage?.

Clare Francis, MoneySuperMarket’s editor-in-chief said stability was key to a healthy housing market and that lenders have a key role to play in evaluating mortgage applications thoroughly.

“Recent changes require lenders to scrutinise affordability more closely than they did in the past, and the proposed measures announced today should reinforce these obligations further.”

But she adds:  “I am still unsure as to whether these proposals will actually have a huge impact on the state of the market, even in London where prices are rising the fastest.”

Check out the best mortgage deals with our best buy tables and calculate what your loan would cost at different interest rates with our mortgage calculator.

Please note: any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.

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