Mortgage affordability explained

GETTING a mortgage approval is the key to moving into your dream home. That mortgage offer hinges on your affordability levels.

That level is decided by banks and building societies. Mortgage lenders scrutinise your income and outgoings very closely to determine how much they’ll offer you.

Affordability – the facts

The Financial Conduct Authority (FCA) introduced new regulations in 2014 to clamp down on affordability checks.

The aim was to ensure people did not take out loans they could not afford after many overstretched themselves and then lost their homes in the credit crunch.

Initially, lenders were extremely strict. Today, they take a more flexible view. But it’s still important to understand how affordability works and what you can do to maximise your chances of borrowing what you need.

How lenders calculate what you can borrow

The single biggest factor affecting how much you can borrow is your income.

“By ‘income,’ lenders don’t just mean your salary; they mean every type of income you get over the year, added together: your salary, bonuses, overtime, investments, company net profit, rental income from other properties, everything.

Lenders usually will not lend more than 4-4.5x someone’s income. This can be tricky because house prices in some parts of the UK are much higher than 4-4.5x a lot of people’s salary – for example, in London.

To get a rough idea of how much you can borrow you can go online and check a mortgage calculator. But these are simplistic and only look at your income.

For a more detailed idea of what you can borrow, you should speak to a mortgage broker who will look at your current account statements, take into account any debts you’re paying and your future plans, to get a much more accurate assessment of how much you could borrow.

What reduces mortgage affordability

Lenders will assess your outgoings, some of which will reduce what you can borrow. Debts will count against you and shrink the loan you’ll be offered.
Those with children might find they can borrow less than they thought as childcare costs will be counted like a debt, as will school fees and child maintenance payments.

Improve your mortgage affordability

*Banks and building societies use a variety of different information to give you a credit score, which determines whether they will lend to you and at what interest rate. Those who have borrowed money in the past and showed they can make repayments on time have more chance of making a successful application.

Lenders like reliable, responsible customers, so living at the same address for a decent amount of time could help, and being on the electoral register will help too. Quite simply, just make sure you repay all credit agreements on time.

*Pay off debt – fast. If you have credit card debt, make sure you are paying as little interest as possible – preferably none. Check which cards are offering the best 0% balance transfer deals and switch the debt so you are not paying back interest on top of the money you borrowed. This means you will pay back the debt faster too.

*Check your credit file for mistakes, which can impact your affordability levels. Rectifying them sooner rather than later will avoid delays to your application.

*Tighten up on spending

Most look at your spending in the three months before you apply for a mortgage, so if you know you’re about to apply, try to live sensibly, and well within your means for several months before.

Hiten Ganatra, Managing Director of Visionary Finance, says: “Lenders continue to ensure affordability at all costs, however, some easing of criteria and improved affordability assessments have resulted in potentially more borrowers getting access to mortgage finance. Lower mortgage rates has helped this.
“A mortgage broker can match a borrower with the right lender for them.”