The ‘one size fits all’ approach to mortgage lending is set to disappear according to a report out this week. Borrowing to buy a house based solely on your salary will be a thing of the past says the report from Alliance & Leicester Mortgages.

The Alliance & Leicester Mortgages study, undertaken by the Centre for Economics and Business Research, analyses the use of income multiples and examines how homeowners are likely to be affected by the use of affordability based lending criteria as more lenders move towards this. Affordability signals a more sophisticated and responsible lending approach based on an individual’s disposable income and personal circumstances, whereas income multiples look purely at gross salary.

The findings show that levels of disposable incomes have risen so, on average, people have more income that could be available for mortgage repayments.

Affordability looks at an individual borrower’s circumstances. The report looked at a number of different household types – both single and dual income households and those with and without children – and using the average income and expenditure for each household type, compared the maximum mortgage lending under income multiples and typical affordability calculations.

Stephen Leonard, Director of Mortgages at Alliance & Leicester, said: "Affordability provides a more responsible approach to lending as it considers an applicant’s individual circumstances – those who are debt free will benefit the most."

"Lenders have responded to changing circumstances. The move towards affordability based lending means that more people will get a helping hand onto the property ladder – and homeowners will continue to be able to ‘move up’ as their incomes rise."

Income multiples are a clumsy way of assessing the level of mortgage payments that people can afford. Couples with two incomes – both those with and without children – are likely to be the biggest beneficiaries of an affordability based approach.

The report found that – based on average incomes – most types of household could potentially afford to put a higher proportion of income towards their mortgage payments than income multiples would give them.

Affordability – although potentially offering higher maximum levels of borrowing to certain customers – is lower risk because it is based on a more accurate picture of the customer’s circumstances.

Affordability takes into account the different levels of essential spending on items including food, bills and transport that different types of household incur – whereas income multiples do not.

Interest rates have fallen steadily and have become less volatile than in the past. This encourages borrowing but doesn’t necessarily take account of affordability.

As income increases, there is a tipping point when an affordability-based approach will start to offer larger mortgages than a simple income multiple approach.

Household types	‘Tipping point’
Singles, no kids	£14,000
Single, with kids	£28,000
Couples, no kids, one income	£19,000
Couples, kids, one income	£28,000
Couples, no kids, two incomes	£9,000
Couple, kids, two incomes	£13,000

The following chart shows how the ‘tipping point’ works – and the extra amount potentially available for those on an income above that level.

Couple with children and one earner

Affordability takes into account other individual factors including the level of household debt.

For example, a first time buyer with an income of £30,000 and no outstanding debt with a £10,000 deposit could borrow a maximum of £147,000 under an affordability based model. However a first time buyer with the same income and deposit, but with £3,000 in credit card debts and £200 in loan payments, could only borrow a maximum of £101,000 – £46,000 less.

The report estimated the borrowing capacity of six different groups based on an analysis of affordability. In general an affordability-based approach will allow higher income households to borrow more – especially those with dual incomes.

The following chart from the report shows how affordability based lending would translate into higher average lending to different household types (based on average incomes for each household type).