by Richard Smith

Created on: August 06, 2008

Deciding on how much you can afford to pay for a mortgage is very much your own responsibility. After many years working for a mortgage lender selling mortgages and supervising mortgage advisers I can tell you that a lender will have their own criteria for calculating how much they are prepared to lend and fundamentally this will be based upon their own assessment of your ability to pay the mortgage however the person in the best position to truly assess this is yourself.

Rule of Thumb Methods

There are a couple of rule of thumb methods that you can apply. It is important to note that in my opinion these will only give you a ball park figure to work with and in no way would I advise basing a decision solely on these without doing an in depth analysis of your budget (more on this later).

The first rule of thumb is based upon income multiples. When I worked in a bank these were the starting positions for all income assessments on lending decisions. It is important to note that during the sixteen years that I was involved in lending these multiples did not change at all irrespective of the underlying mortgage rates and as such can give you some idea of their relative usefulness. It is only in recent times that these multiples have been increased to reflect a relatively stable low interest rate however the wisdom of doing this is coming back to haunt some lenders, and more importantly borrowers, in the current economic climate.

If you are a single borrower then the standard multiplier hat my bank used to apply was three times gross annual income. Existing large monthly loan payments, say for car finance, would be annualised and deducted from that total. For example someone on $50,000 per annum would normally qualify for a loan of $150,000 however a $1,000 monthly car loan would reduce that amount by $12,000 to $138,000. As you can see this is a somewhat crude method and was essentially used as a guideline starting point. For joint incomes the multiple was either 2.5 times joint gross income or 3 times one and add the other. Which one that is used would depend on the relative spread of earnings between the two parties.

Before the current economic problems and the tightening of lending criteria some lenders were going considerably beyond these guidelines, with some being prepared to lend up to six times income. Now in my opinion this is just ridiculous and emphasises the point that you as a borrower must take your own steps to work out how much you can borrow.

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