Understanding how mortgage affordability is calculated is key
WHEN YOU APPLY for a mortgage, the lender’s decision on how much you can afford to borrow can seem like a mysterious one. But there’s no magic or secret behind the outcome, just a simple affordability formula. Here are the factors the mortgage lender will consider.
YOUR INCOME
In the past, your income was the only factor that mortgage providers would base their decision on. But things have become more complicated since then. However, your income is still considered to be one of the main determinants of whether you can afford to pay back the mortgage loan. Some mortgage lenders may offer larger loan amounts to people in certain professions with higher earnings or higher combined household incomes. In some cases, the income multiple you’ll be eligible for can also depend on the loan-to-value ratio you’re borrowing at. But following the coronavirus outbreak, many mortgage lenders have imposed stricter rules on how much you can borrow. So, you’ll need to prove to mortgage providers how much your annual income is. If a significant portion of your income doesn’t come from your regular salary, but instead from overtime, bonuses, commission or dividends, you’ll need to find a mortgage provider who will include these in their consideration. Some will also include pension income, tax credits and allowances.
“In the past, your income was the only factor that mortgage providers would base their decision on.”
YOUR CREDIT SCORE
Mortgage providers will always check your credit score with a credit reference agency before agreeing to lend you money. Your credit score will reflect any financial issues you have encountered in the last six years, such as loan defaults, county court judgements, individual voluntary arrangements or bankruptcy. These issues will affect whether a mortgage provider will lend to you, how much they will lend you and the interest rate available to you.
YOUR DEPOSIT
Having a large deposit (relative to the value of the property you intend to buy) demonstrates a certain level of financial responsibility to mortgage providers. It also lowers the risk of lending to you, as the money lent could be more easily recovered when the property is sold, if you were to default on the loan. So, generally speaking, the more you have saved, the more money you’ll be able to borrow.
YOUR OUTGOINGS
One of the ways that affordability checks have changed in recent years is that mortgage providers must consider how much of your income is spent on essential outgoings. After all, knowing your income isn’t that helpful if you already spend 70% of it on bills and loan repayments.
Essential outgoings include:
• Groceries, toiletries and cleaning supplies
• Household bills, e.g. gas, electricity, broadband
• Car costs, e.g. vehicle tax and fuel
• Other essential travel costs, e.g. train fares
• Insurance, e.g. home, life, medical, critical illness insurance
• Medical costs, e.g. contact lenses or prescriptions
• Debt repayments, e.g. credit cards or other loans
OTHER SPENDING
As well as how much of your income is spent on essentials, mortgage providers will also look at the cost of your current lifestyle.
So, they might want to know how much you spend on:
• Dining out
• Entertainment
• Shopping
• Holidays and non-essential travel
• Gym memberships
If a large part of your salary is spent on these non-essentials, you’ll be less likely to keep up with mortgage repayments in the future. So, if you have costs in these areas that you’d happily sacrifice to afford a bigger mortgage, you might consider cutting them several months before you make your application.
FUTURE OUTGOINGS
It’s not enough for mortgage providers simply to assess how easily you can afford a mortgage now, as it’s a longterm loan. They’ll need to consider if you’ll be able to afford it in the future. So, they’ll consider the likelihood of various circumstances occurring while you have the mortgage, such as redundancy, serious illness or having a baby. If you’re currently pregnant or have young children, the cost of raising these children may be included even if it is not reflected in your current spending. Having enough cash savings (at least enough to cover between three to six months’ worth of outgoings and spending) can help to demonstrate to a mortgage provider that you would still be able to afford your mortgage.
FUTURE INTEREST RATES
There are other future changes that could affect your ability to afford your mortgage repayments, and the most significant is an interest rate rise. Mortgage rates could rise and fall multiple times over the lifespan of your mortgage and, unless you have a fixed-rate mortgage, could lead to your monthly repayments increasing. A mortgage provider will check if you’d still have enough income left after your essential outgoings and other spending to make these repayments, based on certain assumptions they use. Though mortgage providers all use broadly the same affordability criteria when deciding how much to lend you, there are small differences in what they’ll each check, which could mean that one mortgage provider will lend you more than another. It can be time-consuming to find the provider that will lend you the money you need. We can work with you to find the best arrangement.
>> WANT TO DISCUSS HOW TO GET THE BEST MORTGAGE DEAL AVAILABLE? <<
We can help navigate you through every stage of finding and applying for a mortgage to get the best deal available. For further information or to discuss your situation, contact - UK +44 (0) 203 883 1017 Hong Kong +852 6017 4140 – email info@cedar-crest.co.uk.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Comments