Whether you are a first-time borrower or you are taking out a remortgage, you need to understand the affordability assessment made by a mortgage lender. If you know how it works, you will be able to improve the chances of approval and secondly you will not face any problems while paying off the due amount every month.
A mortgage is a considerable amount, and the length also extends over a couple of years. Your financial situation is not likely to be stable throughout the term of the loan. It is essential to keep up with repayments even if the stream of cash inflows becomes thinner.
Whether you apply for a mortgage with a lender directly or consult a mortgage broker in Edinburgh like Shinemortgages.co.uk, the assessment criteria will be the same. However, if you apply with the help of a broker, they will suggest you lenders who will highly likely to approve your application.
There were times when mortgage lenders use to lend you money five times more than your current income. For instance, if your income is £50,000, you could take on five times larger than this amount that is up to £250,000. The Financial Conduct Authority reviewed the mortgage market and discarded this policy to introduce an affordability concept.
With income-based mortgage was a problem that if your income does not align with the soaring cost of the living, the repayment burden continues to rise, increasing the risk of falling in a vicious circle of debt.
Since the affordability concept introduced, mortgage lenders started to analyse the repaying capacity of borrowers by taking into account their living expenses. It means now getting approval for a mortgage is not as easy as it used to be. A lender may turn down your application if they are sceptical about your repaying capacity.
Here is what lenders take into account to check your affordability.
When you apply for a mortgage, a lender will look over your income. It means all sources that contribute to cash inflows, for instance:
- Your primary income source like salary
- Income from investments
- Any financial support from your parents or ex-spouse
- Any freelance work, commission or bonus
Remember that you will have to provide payslips to prove your income. If you are self-employed, you will need to provide a bank statement, and income tax returns to help a lender get an idea of your total earnings.
Even a high income cannot prove your affordability. Your money is what you have left after meeting all of your regular expenses. It is called net worth. A lender always wants to know your net worth so that you do not struggle to meet recurring expenses along with mortgage repayments. The purpose of looking over your income statement is to find out your outgoings. It includes but not limited to:
- Credit card repayments
- Building maintenance
- Insurance premiums
- Utility expenses
The lender will also ask you to give an estimate of spending on clothes, groceries, childcare and recreational activities. Make sure that you disclose all costs, otherwise, you will have trouble in paying back the loan.
Expected future changes
When you buy a mortgage, you will get a fixed interest rate deal for a couple of years like two years, three years or five years. As the fixed interest rate period expires, you will be put on standard variable interest rates. It keeps going up and down based on the base rate charged by the Bank of England.
Before signing off on your application, a lender will take into account circumstances that may have an impact on your repaying capacity. Such unexpected circumstances include:
- You may lose your job, or your business may face the downfall.
- You may catch an illness.
- Financial life change because you have got a baby
- Interest rates may go up.
Taking into account unexpected drops in income is crucial to make sure that you will be able to manage to repay your mortgage without any defaults.
At the time of applying for a mortgage, you should use online mortgage calculators. You will get an idea of the total cost of the mortgage, or you can take guidance from a mortgage broker.