The Mortgage-to-salary ratio

When buying a home lenders will consider your overall finances including any debt, your credit score, current salary and security before determining how much they are willing to lend. This benchmark is typically set at 4.5 times a borrower’s salary, this ensures that homeowners can manage their repayments without a heavy financial strain.

This ratio can vary significantly depending on various factors including your specific circumstances as well as the location of the property. Mojo Mortgages have found that 1 third of cities exceed the 4.5 ratio and some are required to borrow 15 times their salary.

 

The 4.5 Times Salary Benchmark

The 4.5 times salary benchmark is a straightforward calculation that lenders use to determine how much they are willing to lend to a borrower.

For instance, if an individual's annual salary is £30,000, they would typically be allowed to borrow up to £135,000 for a mortgage.

This ratio is designed to ensure that borrowers do not overextend themselves financially, making it easier to keep up with repayments and reducing the risk to the lender.

However, this benchmark is not a one-size-fits-all figure. Lenders may adjust the amount they are willing to lend based on a borrower's existing debt, credit score, and other financial commitments. Additionally, the location of the property plays a significant role, as house prices vary widely across different regions.

 

Halifax and Lloyds have increased their ratio to 5.5 times the borrowers salary.

 

Disparities in Mortgage Affordability Across the UK

Mojo Mortgages' data reveals a concerning trend: the 4.5 times salary benchmark is increasingly out of reach for many potential homeowners, particularly in southern cities.

For solo homeowners, the situation is even more dire, with 96% of cities having a mortgage-to-salary ratio that is considered unaffordable.

We know already that living alone comes at a higher cost and in some cities it's just becoming further out of reach.

The differences in mortgage vs. salary across various regions highlight the growing affordability crisis, with many borrowers needing to stretch far beyond the traditional lending benchmarks to purchase a home.

In some areas, the gap between salaries and house prices has widened to the point where buyers are needing to borrow up to 15 times their salary to secure a mortgage. Bath tops the list of the most unaffordable cities, where the average mortgage-to-salary ratio is a staggering 15.5 times for solo homeowners and 7.7 times for couples. This means people are borrowing over their salary to buy a house.

For many prospective homeowners, securing a mortgage based on salary is becoming increasingly difficult, particularly in areas where property prices far exceed the average income.

This contrasts with Middlesbrough, the most affordable city, where the ratio is just 3.7 times for solo homeowners and 1.8 times for couples.

When trying to find a home you should take into account how much of your salary should be spent on the mortgage being realistic with what you will be able to afford.

 

Policy Updates on Mortgage-Salary Ratios

In September 2024, three major UK mortgage lenders introduced significant changes to their lending criteria, allowing prospective homeowners to secure larger loans with a higher salary-to-mortgage ratio. These changes aim to improve affordability and access to the housing market.

Halifax and Lloyds have both increased their criteria to borrow up to 5.5 times their annual income. This means for someone earning £30,000 a year they could now secure a mortgage of up to £165,000.

Nationwide, one of the largest lenders, updated its policy to help first-time buyers by offering loans up to 6 times their salary, provided they can offer a 5% deposit and choose a 5 or 10-year fixed-rate mortgage. This shift in the UK mortgage-salary ratio marks a notable increase from the previous cap of 4.5 times salary.

According to Mojo Mortgages, this policy change has made 17 cities more affordable for solo buyers, a significant increase from the previous 3 cities. For couples, the number of affordable cities has risen from 52 to 72, reflecting the broader impact of this updated lending approach.

The North-South Divide

The data from Mojo Mortgages underscores a significant North-South divide in mortgage affordability. Southern cities like Bath and Brighton are among the most expensive, with Brighton's mortgage-to-salary ratio standing at 13.72 for solo homeowners and 6.86 for couples. This makes it increasingly difficult for residents in these areas to get on the property ladder without taking on a disproportionate amount of debt.

Conversely, cities in the North of England generally offer more affordable options. Middlesbrough, for example, presents a more realistic mortgage-to-salary ratio, making it easier for both solo homeowners and couples to purchase property without overextending their finances.

 

The Future of Mortgage Lending

For those looking to buy a home, understanding the mortgage-to-salary ratio is crucial. It provides a clear indication of what they can realistically afford and highlights the importance of careful financial planning.