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Mortgage Income Multiples – Credit Scoring Not Good News for Everybody

Mortgage Income Multiples – Credit Scoring Not Good News for Everybody

Category: Mortgages

Updated: 31/10/2008
First Published: 29/06/2005

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Moneyfacts has recently seen an increase in the number of providers that have introduced a credit scoring system to set the level of their income multiples when calculating a customer's affordability for a new mortgage.

These include some of the big names in the industry such as Bank of Scotland, Northern Rock and NatWest.

Until recently, mortgage lenders always quoted the maximum income multiples they were prepared to consider. For example, Bank of Ireland currently will lend up to a maximum of 4 x 1st applicant's income, plus 1 x 2nd applicant's income or alternatively 3.25 x joint income.

Once the maximum level of advance is established, the customer’s ability to repay is assessed, a credit reference search made and a credit score is undertaken before a mortgage is approved. Under the new method of setting mortgage income multiples, a lender will ‘credit score’ the customer’s application as the starting point of the process. If the customer obtains a high score, i.e. considered a low risk, they could qualify for a mortgage of as much as six times their annual income. However, if you obtain a lower score and the lender is still prepared to sanction your application, you may only qualify for a mortgage of 3.2 times your annual salary.

Darren Cook, Head of Mortgages at Moneyfacts said: “The new system offered by some lenders will be good news for some borrowers looking to take up a mortgage, as they will be able to take out a bigger mortgage than may have previously been available.

“However, this might not be good news for all potential borrowers. Even if you have a clear credit reference search, the credit scoring system used by a lender is based upon, amongst other things, the probability of future events, and may work against you.

As an example, if statistics show that, out of 100 people with identical lifestyle circumstances (using criteria mentioned below), there is a probability that 25 will default on their mortgage, all 100 will receive a low credit score, with 75 people being ‘tarred with the same brush’ purely because they happen to fall within a perceived higher-risk category.’

Amongst other things, a credit score system will take into account your age, marital status, number of dependants, occupation details, length of employment, the loan to value percentage, loan purpose and the area in which you live.

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.