Affordability is your ability to manage your mortgage repayments as assessed by the lender. Each lender has their own formula of what it costs you as adult with 2 children, 1 dog and a fish based on national cost of living statistics. Each lenders affordability can be different to the next, depending on their ability to lend money at that time, which can be as simple how much business they have at that time. Some lenders affordability might not be very good one week and then they make changes meaning they would offer you more money the next. This is a fluid thing with lenders so you need to make sure you compare a lot of different lenders at the same time, this is where it is often useful to have a whole of market independent mortgage broker to help.
Factors that make up lenders affordability assessments:
Income: lenders will look at the type so income you have, this may be employed salary, or hourly rate, it maybe self -employed income or benefit income. Lenders are looking for sustainable income that will allow you to afford the mortgage for the term of the loan. (Remember the term is how long you take the mortgage over so maybe 25 or 40 years)
Expenses: Lenders will look at your commitments, that could be debts, general living expenses and regular outgoings like food, council tax, utilities.
Debt to income ratio (another mortgage term): Your debt-to-income ratio is how your monthly debt payments compare as a percentage to your monthly income. The lower your debt-to-income ratio the more favorable you will be looked at.
Credit history: Lenders will look at your credit history and how you have handled previous debts. You may find that if you have a poor credit history that you are offered a higher interest rates to help against the risk you pose to a lender because your track record hasn’t been so good.
Future interest rate rises: Lenders will carry out what is called a “stress test” and will assess your affordability based on higher interest rates to make sure that if the interest rate you are taking increases in the futures you can still afford the monthly payments.
General affordability criteria: Each lender has their own criteria around affordability which could be a standard minimum income, or even a maximum loan amount based on your income level, i.e. no more than 4 times income. But this sort of criteria is difficult to find from each lender so it is a good idea to talk to an independent mortgage broker who will have a good knowledge of this sort of information saving you the time of having to find it all out.
All a lender is doing with affordability checks is making sure that the monthly payments are affordable to you now and in future. But this won’t always seem fair, particularly when if you have been paying rent for a period of time and mortgage payments work out cheaper for you each month. But there are a lot of lenders out there so don’t get put off if the first lender you apply to says no, it doesn’t always mean you cant get a mortgage it just means that particular lender doesn’t want to lend to you at this time.
