Making Refinance Home Mortgage Rates Ratios work for you.

Understanding refinance home mortgage rates ratios that lenders use when assessing your mortgage will give you the power to increase your credit score.

There are several different ratios used in calculating mortgages;
Debt to Credit Ratio
Debt to Income Ratio or Affordability Ratio
Income Multiple

Each of these are used differently within the credit and mortgage advice process by mortgage and home loan lenders.

What they are Refinance Home Mortgage Rates Ratios?
Debt to Credit Ratio
This reflects your credit card level and the risk of over-exposing yourself to debt. It is simply how much you owe in proportion to your credit limit.
For example if you have a credit card with £8,000 limit and your balance is £4,800 then your Debt to Credit Ratio is 65%.
Now remember you need to include ALL cards into this ratio. Therefore all credit cards, store cards and many lenders also include catalogue balances as an account such as this acts the same as a credit card. You can use our consolidation calculator to add these if it's easier.

Debt to Income Ratio
This ratio is also referred to as an affordability ratio and is the major factor when determining your credit score. Simply put it is the level of monthly debt commitments (credit card payments, store cards and personal loans) but NOT your mortgage payment, divided by your monthly gross (before tax) income.

The lower the ratio the better (lower) risk to lenders. Most experts agree that your income ratio should be below 20% and below 40% including your mortgage payment.
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What if your Debt to Income Ratio is Higher?
The higher the ratio, the greater the risk of you becoming insolvent. There are still lenders who will lend to you but as the refinance home mortgage rates ratios increases, so does the interest rate charged as it reflects the risk to the home mortgage lender. Some UK Home Mortgage Lenders will loan up to 53% Gross income on an affordability ratio.

Example:
Gross Annual Income £25,000 or £2,083/mth
Multiply by 53% maximum = £1,104
Deduct from this any other loans and what you are left with is the maximum mortgage payment.
So if you have a car loan for £154 per month, you maximum mortgage could be £900/month
For an Interest Only mortgage at 8.5% pa this would be a
Mortgage of £154,285
Or on a repayment mortgage over 30years, a mortgage of £117,048

Income Multiple
This is the simplest of basic calculations to establish how much you can borrow In it’s most simplest form it is your Gross income times a ratio which varies from lender to lender. The higher the ratio the greater the risk as obviously there’s greater borrowing capacity.

For Example
If you gross basic annual income is £25,000
The bank’s Income multiple is 3.5 then maximum borrowing would be £87,500
If there multiple was 5.1 then the same person could borrow £127,500
Obviously the second lender is taking a greater risk so therefore the rate would be higher.

More complex.
These ratios usually revolve around “Basic” income and often only include part (usually 50%) of overtime, bonus or commission income.
Second borrower. In days gone by many lenders didn’t apply the ratio to both applicants (most do now) and would only add 1x the second applicant’s income. So a partner earning say £13,000 only added that amount to the borrowing ability.
Now, many mortgage lenders apply the ratio to both meaning a couple earning £25,000 and second income of £13,000 could effectively borrow £193,800 with an income multiple of 5.1

As you can see it’s vital to understand refinance home mortgage rates ratios and how to use them to your advantage.

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