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How Do Mortgage Affordability Checks Work?


How Do Mortgage Affordability Checks Work?
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Almas Uddin
Almas Uddin

Founder and Mortgage Advisor

Almas Uddin17 Feb 2024
    

What Is a Mortgage Affordability check?

Mortgage affordability is a process that lenders use to work out what they can offer to lend, based on whether they think you will be able to keep up with the payments.

In this guide, the Revolution Brokers team has collated the answers to the most frequently asked questions about mortgage affordability.

For further assistance with calculating your mortgage affordability, give us a call on 0330 304 3040, or email us at [email protected].

What Calculations do Lenders Use to Work Out what Mortgage I Can Afford?

Lenders need to look at your income, outgoings and other factors to establish what they believe you can afford to borrow. This is called an affordability assessment.

The checks carried out will depend on the lender and their policies, and start with a basic calculation, which takes your annual earnings and multiplies that by a fixed amount. Most lenders will offer around four times your salary.

For example, if you earn £30,000, then a lender offering four times salary multiples would provide you with a maximum mortgage of £120,000.

Also, lenders need to lend responsibly and therefore need to check several other circumstances before making an offer.

You can borrow a higher multiple of five or even six times your income, dependent on passing the other eligibility criteria.

What Information Does a Lender Need to Calculate Mortgage Affordability?

You will be asked to provide information and documentation relating to:

  • Your job or business.
  • What you earn a year.
  • Any employment allowances.
  • Your expenses and outgoings.
  • Credit history.

Why Do Banks Need to Carry Out an Affordability Assessment?

This assessment gauges the likelihood that you earn enough to be comfortably able to keep up with the repayments.

If a lender suspects you will not afford the loan, they cannot offer to lend.

How Long Do I Need for an Affordability Assessment?

An assessment takes place most of the time after the initial application, but before any formal offers can be made.

This process can be fairly detailed, and usually includes a soft credit check that will not leave a mark on your credit file. Once the application progresses, this goes on to the underwriters to take a closer look.

Usually, an assessment will take anything from two to six weeks - although you can speed this up by consulting an independent broker beforehand who will be able to advise on what information is relevant.

What Does an Underwriters Reassessment Involve?

Once the initial checks have been passed, the underwriter will take another look at the property, your credit record, and the eligibility and affordability assessments carried out.

This process is more detailed, and will also look at your current circumstances to ensure nothing has changed since the initial application.

What are the Most Common Reasons for a Mortgage Application to be Rejected?

Lenders can turn down applications for many reasons, including:

  • Having too low an income to prove affordability.
  • Receiving income in ways not accepted by that lender, such as benefits or commissions.
  • High outgoings or too many other debts.
  • Low mortgage to earnings ratio.
  • Bad credit score or history.

If you have been turned down on the grounds of affordability that by no means indicates that another lender won't accept your application.

Most of these criteria depend on the provider's internal lending policies, so it's often a case of finding a lender who we know you will be eligible with.

Does Being in Full-time Employment Make it Easier to Get a Mortgage?

It can do, yes. If you have a full-time job and a stable salary, this is an easy affordability calculation.

However, lenders might take different views on other income, such as overtime.

Typically, applicants who have been in the same role for at least a year are offered the best rates. Lenders can sometimes accept applicants with three or six months of employment history, but this tends to be a more specialist product.

What Variable Income Counts Towards Mortgage Affordability

Many people receive varied income, with overtime, bonuses and commissions as well as employment allowances.

In most cases, this sort of income is included in the assessment, although much depends on the lender.

You will often be asked to provide evidence of payments, such as payslips or bank statements, to allow your lender to calculate the average value of this variable income.

Some lenders will include 100% of additional earnings, some 75% and some only 50%, so if your overtime, for example, makes up a significant proportion of your pay, you will need to choose a lender with a flexible policy on income calculations.

The below table shows three scenarios where an applicant earns income outside of their basic salary, and what mortgage they might be offered depending on how much of that variable income the lender will include.

Salary

Annual Bonus

Yearly Overtime

Annual Commission

Employment Allowances

Lender A - Basic Salary Only x 4

Lender B - Basic Salary + 50% of Variable Income x 4

£30,000

£20,000

£0

£0

£10,000

£120,000

£240,000

£50,000

£0

£0

£0

£20,000

£200,000

£280,000

£20,000

£0

£0

£60,000

£0

£80,000

£200,000

This demonstrates why your choice of lender is so crucial - as you would double your mortgage value by applying to a lender who will consider your other income on the application.

How Do Affordability Checks for Self-employed People Work?

The same sorts of checks apply to self-employed people, but will usually be based on your business profits. Lenders like to see the trading history and calculate an average of the earnings over time.

There are three primary categories of self-employed mortgage applicant:

  • Sole traders or partnerships are assessed on their average net profits, usually over three years. Lenders will need to see accounts, and preferably three years of trading history, although some will accept less.
  • Contractors or freelancers are usually assessed based on their day rate, multiplied by five days per week and 46-48 weeks per year to arrive at an average annual income. For example, if you have a day rate of £250 and a lender assumes you work 46 weeks per annum, they will assess your average annual earnings at £57,500.
  • Limited company directors are usually assessed on their salary plus dividends, also averaged over the last three trading years. In some cases, a lender will also include retained net profits in the business, which can mean borrowing significantly more.

Is There a Minimum Period of Self-employment to be Approved for a Mortgage?

Mainstream lenders will usually accept self-employed applicants with three years of trading history. Some lenders will accept two years, and others one year or even less, depending on the circumstances.

You might be asked to provide three years worth of filed trading accounts, or your self-assessment tax returns as evidence of your income.

What Types of Income are Included in an Affordability Assessment?

Lots of people earn money outside of their employment or self-employment, and some of these may be included in the mortgage affordability calculations:

  • Benefits income
  • Pension payments
  • Maintenance income
  • Trust payments
  • Investment returns
  • Rental income

How these income sources are treated again depends on the lender. Some will include 50% of benefits, whereas others will include 100% provided you have the paperwork to back it up.

How Much Do my Expenses Impact a Mortgage Affordability Assessment?

Lenders need to know what your outgoings are as well as your income - including elements such as costs of living, utilities and existing debt repayments.

If you have debts, the lender will usually look at how much you owe in total and the monthly repayment costs.

For example, if you pay £250 per month against a loan, that means an expense of £3,000 per annum. This figure is deducted from your annual income to calculate the maximum mortgage offered to you.

Some other outgoings will be included by some lenders but ignored by others, such as:

  • Pension contributions
  • Insurance costs
  • School fees
  • Charity donations

After assessing your income and outgoings, a lender will also stress test the application to check that you'd still be able to keep up with the repayments if your circumstances changed, or interest rates increased.

Can I Get a Good Affordability Assessment with an Adverse Credit History?

Having a poor credit record can make it challenging to prove mortgage affordability, but a lot depends on what sort of credit issues you have had, and how long ago they took place.

Some lenders will disregard minor credit issues or those that happened several years ago. If you have had severe credit problems, it might be that a specialist bad credit lender is your best bet.

Specialist Advice on Mortgage Affordability

It can be very complicated to compare mortgage deals since the affordability checks and criteria will differ with each lender.

The fastest and easiest way to work out what you can afford is to work with a whole-of-market broker who can assess your application and advise on the best options for the borrowing you need.

Give us a call on 0330 304 3040 or email the business loan broker team at [email protected], and we will guide you through the mortgage application process from start to finish.

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FCA disclaimer

The content included in our articles, blogs, web pages and news publications is based on information accurate at the time of writing. Note that policies and criteria can change regularly throughout the UK mortgage lending market, and it remains essential to contact the consultation team to receive up to date guidance. The information included on the Revolution Brokers site is not bespoke to any circumstances or individual application scenarios and therefore is not intended to be used as financial advice. The content we share is designed to be informative and helpful but cannot be relied upon to provide individual advice relevant to your mortgage requirements. All Revolution team members are fully qualified, trained and experienced to provide mortgage advice of an independent nature.

We collaborate with lenders and providers who are regulated, authorised and registered with the Financial Conduct Authority (FCA). Should you require specific mortgage borrowing types, some products such as buy to let mortgages may not be FCA regulated. The Revolution team can provide further information about regulated and unregulated lending as required. Please remember that a mortgage is a debt which is secured against your home or property. Your home can be at risk of repossession if you do not keep up with the repayments or encounter any other difficulties in managing your mortgage borrowing responsibly. This also applies to any remortgage or home loan secured against your property, including equity release products.