For solicitors and clients
How mortgage capacity is actually calculated
Almost everyone starts with income multiples. Lenders stopped doing that years ago. Understanding what replaced them explains most of the disagreements about capacity figures.
By Jonathon Mark Turner CeMAP, Mortgage Capacity Specialist ·
The multiple is a cap, not a calculation
Lenders do still apply an income multiple — commonly in the region of four and a half times income, sometimes more for higher earners or certain professions, sometimes less. But that multiple operates as a ceiling. The actual decision comes from an affordability model, and the affordability model very often produces a lower figure than the multiple would allow.
This is why “she earns £45,000 so she can borrow £200,000” is so often wrong. It is the arithmetic of the cap, not of the assessment.
What the affordability model does
In outline, a lender takes net income, deducts committed expenditure, deducts an allowance for essential and basic quality-of-living costs, and then asks whether what is left would still cover the mortgage payment if interest rates rose to a stressed level. The maximum loan is the largest amount that survives that test.
Four things drive the answer.
1. What counts as income
Basic salary is straightforward. Almost nothing else is. Overtime, bonus and commission are typically counted at a percentage — 50%, 60%, 100%, depending on the lender and on how consistently the income has been earned — and the averaging period differs too, some taking the latest year, some the average of two, some the lower of the two.
Self-employed income is worse. Some lenders use the average of the last two years, some the latest year, some the lower of the two. For a limited company director, some use salary plus dividends and some use salary plus the company’s retained profit, which can produce dramatically different figures for the same person in the same year.
In a financial remedy case this is frequently where the argument really is. A party whose income is 40% variable will have a genuine capacity range, not a capacity figure, and a report that conceals that is not helping.
2. What is deducted
Credit commitments with more than a short period remaining, childcare, school fees, and maintenance paid. Dependants matter twice over — once through childcare cost and again through the lender’s own expenditure assumptions, which increase with each dependent person in the household.
The dependants point is worth pausing on, because it is the one most often mishandled. Where the children live primarily with one parent, that parent’s borrowing capacity is reduced — sometimes substantially — precisely because they are the one who needs to rehouse the children. It is a recurring feature of these cases and it should be stated plainly rather than buried.
3. The stress rate
The lender does not test affordability at the pay rate. It tests it at a stressed rate, which moves with the interest-rate environment and with regulatory expectations. That is why capacity figures change over time even when nothing about the borrower has changed, and why a report goes stale in three to six months.
4. Term
Term is the quiet one. A longer term reduces the monthly payment and so increases the amount that passes the affordability test. But term is constrained by age: most lenders will not run a term beyond a stated maximum age, and where income relied on ends at retirement, the term is capped at retirement.
For a party in their fifties, term is frequently the binding constraint rather than income. Two people on identical incomes, one aged 38 and one aged 54, can have very different capacity for that reason alone, and a report that does not identify which constraint is binding has not answered the question.
The other constraints
- Loan to value. The deposit or equity available determines which products are open at all, and at high loan-to-value the choice narrows and the assessment tightens.
- Credit history. Adverse credit does not simply reduce the figure; it changes which lenders will consider the case at all, which in turn changes the criteria being applied.
- The property. Tenure, construction, flats above commercial premises, short leases and ex-local-authority stock all restrict the lender pool independently of the borrower.
Why two competent reports can disagree
Because they are answering slightly different questions. Two reports on the same person will differ if they assume different care arrangements, different maintenance terms, different retirement ages, different deposits, or a different sample of the lending market.
That is precisely why the assumptions belong in the letter of instruction and on the face of the report, and why joint instruction is worth the effort: it removes a whole category of disagreement before it starts.
What a capacity figure is not
It is not a mortgage offer, and no lender is bound by it. It is not a decision or agreement in principle. It does not identify or recommend an individual lender or a mortgage product — that is a boundary we keep deliberately, to maintain a clear distinction between an assessment of mortgage capacity and regulated mortgage advice. It is a reasoned opinion about what the market would be likely to support, on stated facts, at a stated date, which is what a court actually needs in order to test whether a proposed settlement can be implemented.