Decoding the Mortgage Math: Why Lenders Go 4.5x Your Salary

You’ve probably heard that most mortgage providers are willing to give you a mortgage that’s around 4.5 times (x) your annual salary. 4.5x is pretty specific and kind of random right? Let’s get into why this is the amount suggested.

First things first, why not 5 times or 3 times? With a 4.5x option, it lets lenders strike a balance between making homeownership accessible and preventing financial disasters. The 4.5 times salary rule basically acts as a financial reality check, ensuring that you don't bite off more than you can chew. It's like having a responsible financial friend saying, "Hey, make sure you can still afford groceries and the occasional weekend splurge after paying your mortgage!"

This multiplier also takes into account your ongoing expenses. This can be anything from your normal monthly expenses such as groceries, through to outstanding debts and any other financial obligation you might have. Essentially, at 4.5x your salary, your mortgage is provider is hoping that they’ve allowed a “stress-test” in which your mortgage monthly payments are still affordable if a couple of things change.

Let’s be honest – the lender still has to protect themselves. So, by offering you 4.5x your salary they’re mitigating the risk that you might not be able to afford it long term and end up defaulting. In order to reduce their risk, they also request a deposit – this way, you know you’ve got some skin in the game too.

The 4.5x multiplier is a government rule so that banks are sensible with how much they lend customers. Only a small proportion of their loans can be made at a higher rate of 4.5x, usually to the most stable and low risk customers. This rule doesn't mean you're stuck with a shack when you dream of a castle. Lenders also take into account other aspects of your financial profile like your credit score, the interest rate at the time, and the type of mortgage and combined, these can influence the final loan amount.
So, next time you're crunching numbers and playing with mortgage calculators, remember the 4.5 times salary rule is like a financial safety net, ensuring you find a mortgage that fits snugly into your budget without turning your homeownership dream into a financial nightmare. Klink helps provide guidance across your entire financial profile so you can feel a bit more confident before you get your Agreement in Principle.

Happy house hunting! 🏡