How is mortgage affordability calculated?

When you are in the process of buying a property, mortgage affordability will play a vital role in whether you will be accepted for a mortgage or not. After all, you will need to consider more than just whether you can simply afford the monthly repayments.

If you are going through this process, or are planning to do so in the near future, mortgage lenders will ensure you can keep up with the monthly repayments, in the event of interest rates rising or should your personal circumstances change. This piece of due diligence is known as a mortgage affordability check.

What exactly is a mortgage affordability check you may ask? And how is it calculated? This article will cover all of the questions you may be wondering, offering a comprehensive guide to the world of mortgage affordability.

What is a mortgage affordability check?

Before uncovering how mortgage affordability is calculated, we must determine exactly what it is.

A mortgage affordability check is an important step in the mortgage application process in the United Kingdom. Lenders conduct a thorough evaluation to determine the amount of money that you can borrow to purchase a house. This ensures that borrowers do not take on debt they cannot comfortably repay.

To work this out, a mortgage lender will look at set factors, primarily your annual income, as well as your ingoings and outgoings. Through this assessment, mortgage lenders will be able to determine what they think you are able to afford.

Ensuring your mortgage payments remain affordable, will benefit both yourself and the mortgage lender in the long run.

How do mortgage lenders assess affordability?

Mortgage lenders will each have their own affordability assessment put into place. However, most lenders will base their decision on what is known as the loan-to-income ratio, which essentially is the amount you want to borrow divided by how much you earn.

Loan-to-income ratios, or income multiples, are widely adopted by lenders as they can give a straightforward narrative, in terms of what you will be able to afford.

Once the ratio has been determined, you should have a good idea as to what you will be able to afford. The multiple that lenders will allow can vary depending on their specific lending policies.

Before approaching mortgage lenders you should be able to get a ballpark figure, on the amount you will be able to borrow, through the use of a mortgage affordability calculator. Using a mortgage affordability calculator will give you an approximate estimate of what a potential mortgage lender would be willing to offer you.

Even better, by speaking to a reputable mortgage broker such as Eden Hawk, we will be able to guide you through the mortgage process from beginning to end. Our team of experts will be able to give you an accurate picture when it comes to the mortgage landscape, such as a full mortgage review which will include the amount a mortgage lender will be likely to offer you based on your personal circumstances.

The Different Types of Eligibility Criteria and How They Can Affect Your Application

Aside from your income-to-loan ratio, lenders will also consider other criteria when determining their affordability checks.

Again, each lender will have their own specific eligibility criteria, which may aid or hinder your application. Some of the key factors they may consider have been outlined below.

Outgoings

Lenders will ensure to look at your bank statements and track your outgoings. This is done to make sure there are no causes for concern in your spending patterns. If you are in the process of applying for a mortgage, you can be certain that any potential lenders will conduct a thorough review of your bank statements, determining what you typically spend your money on and your monthly spending versus your monthly income. For instance, if your outgoings take up nearly all of your monthly income, lenders may see this as a warning sign and lend less than initially anticipated.

Some examples of outgoings that lenders may look at include:

• Credit card payments
• Insurance – building, contents, life, pet, etc
• Loan or credit agreements – Car finance, etc
• Bills – water, gas, electricity, etc

Credit History & Credit Score

Your credit score and history will play a vital role in the amount a prospective lender may let you borrow. These metrics will give lenders a brief overview of your credit history, over the past six or seven years typically. Any red flags such as missed payments, bankruptcy or accounts in default will be highlighted on your credit report, which in turn leads to a lower credit score. A poor credit history may affect you both in terms of the amount you can borrow, as well as the number of lenders who would be willing to consider your application.

If you are looking to start your mortgage application process in the near future, ensure that you download all of your credit reports beforehand. By doing so, you can see whether you are currently on good ground or if some work needs to be done before submitting any mortgage applications.

Types of Employment

The type of employment you are engaged in can also be an important piece of any affordability assessment. Whether you are an employee or self-employed may be a determining factor in how your application is assessed. Traditionally lenders have been stricter for those who are self-employed, either requiring more in-depth information regarding your business or even alternative rules when it comes to the application.

Sources of Income

Each lender will have different definitions, in terms of what they accept as an income source. For example, some lenders may or may not accept commissions, bonuses or overtime as a valid source of income. Therefore, if you want these sources of income to be considered, ensure to deal with a lender who will take these into account.

What is a mortgage stress test?

Due to the Financial Conduct Authority’s (FCA) guidance, lenders will also carry out a mortgage stress test during affordability assessments. This is to ensure a mortgage would still remain affordable for the applicant in the event of circumstances changing, such as interest rates increasing or being made redundant.

Stress tests are implemented to safeguard both you and the lender, as much as possible. To ensure even during uncertain periods, you will be able to afford your monthly mortgage payment.

Need Help With Your Mortgage Application? Eden Hawk Can Help!

If you are looking to start your mortgage application soon, but feel overwhelmed or need guidance, Eden Hawk is here to help you.

As a leading mortgage broker in South Wales, our team of experts specialise in finding the most suitable mortgage solution for you, personally tailored to your individual requirements. So whether you are in need of a full mortgage review service or you are a first-time buyer looking to get onto the property ladder, let us guide you towards your end goal.

At Eden Hawk, our goal has always remained a simple one: to assist as many home buyers and property investors as possible, helping to plan your financial future.

Contact us today for a free no-obligation initial consultation. One of our dedicated team members will then be in contact ASAP, to talk through any of the questions or queries you may have.