Your mortgage affordability

When looking to determine your mortgage affordability, mortgage lenders can now do a complete deep dive into your finances and highlight key points of interest such as how many times you dine out, the type of restaurants you dine at, if you are a gambler, if you take holidays often etc.

These factors will all affect your mortgage affordability.

It is not clear what underwriting procedures all mortgage lenders use as they are all different but as a rule of thumb if you wouldn’t lend money to someone with a particular factor then a mortgage lender probably won’t.

Since the mortgage market review occured a few years ago, mortgage lenders have increased their mortgage affordability checks to ensure they meet regulatory standards set out by the FCA

Mortgage lenders still use a 4.5 income multiple (or something similar but the income multiples mortgage lenders use range from 3 to 5.5) to determine how much mortgage they can give you.

Example: If you earn £60,000 you may qualify for a £270,000 mortgage but they will always carry out a more indepth deep dive into your finances to determine your true mortgage affordability.

If your proposed mortgage repayments on top of your basic living costs will take up an excessive amount of your monthly income then a mortgage lender would be reluctant to lend that amount to you as your mortgage affordability will be deemed low.

What factors mortgage lendrs consider for yourmortgage affordability

When deciding if to lend to you mortgage Lenders may look into:

  • How much you earn
  • If you have any existing debts
  • What your committed expenditures are and how likely they are to rise
  • If you have any dependants e.g Children or plan to
  • If your employment is stable
  • Your age- some lenders will not give you a mortgage if you are approaching retirement or the mortgage term will end after you are 75
  • The mortgage term- which intertwines with the above
  • If you are applying alone or with a co-buyer(Co-buyers can greatly boost your affordability, hence why we are such big fans of a co-buyer network “Homebae”)

Do mortgage lenders check your credit file?

To determine your mortgage affordability most mortgage lenders will check your credit fle and mortgage lenders have their own different credit scoring models which all differ.

Some things to look out for on your credit files before applying for a mortgage.

  • Have you missed a payment in the last 3 months before applying?
  • Have you got too many open accounts on your credit file?
  • Have you got too many addresses on your credit file?
  • Have you made too many credit applications recently?

The things above can hugely affect your mortgage affordability ad limit your chances of getting a mortgage.

How mortgage lenders view your Overdraft?

Lenders may still lend to you if you have been in your overdraft, just as long as it is not consistent(hence you are not dipping in to your overdraft ever so often). If you seem reliant on your overdraft then this may very well affect your mortgage affordability as the mortgage lender views you as being financially unstable.

Mortgage lenders will each have their own different criteria for how they treat overdrafts but generally they wil like to see a constant positive behaviour.

For example during christmas it is understandable that you might have to dip into your arranged overdraft, but if you are living in your overdraft month on month they may be very hesitant to approve your mortgage as it shows you are living beyond your means.

As mortgage lenders can ask to see up to 6 months of your bank statements it is generally good practice to get your spending habits in good shape before this timeline and not within it.

Getting yourself mortgage ready months in advance will mean that when it comes near the time for you to get a mortgage your mortgage affordability will likely be at a better state than if you hadnt.

How to Improve your mortgage affordability

To improve your mortgage affordability, you should focus on these categories:

  • your mortgage affordability
  • your spending habits
  • your credit score
  • Your current credit commitments

Your mortgage affordability

Your affordability essentially boils down to the lender seeing a consistent yearly income that is enough to keep up with your monthly payments and living expenses that fit sufficiently within that income with room to cover your monthly mortgage repayments. If you cant meet this basic mortgage affordability requirement then it is very unlikely you wont be able to get a mortgage.

You can use our Property ladder plan to get a quick health check and see what your mortgage affordability looks like prior to applying for a mortgage. Huuti will show you exactly what the mortgage lenders may be looking at and what changes to consider making to increase your mortgage affordability.

For example, If your monthly mortgage repayment makes up more than 35% of your combined monthly income then many mortgage lenders may not be willing to lend to you as your mortgage affordability is low.

Your spending and repayment habits

When it comes to your mortgage affordability there are two spendng habits that can severely ruin your chances.

1.Not paying your bills on time and

2.Not having a history of ‘normal’ spending habits. e.g random betting.

What you need to do to improve your mortgage affordability:

If you haven’t been doing so already then start paying your bills on time! If you do not have a track record of doing this running up to your application, it may severely harm your chances.

Review your bank statements for any transactions that would raise concerns or require an explanation. For example, blowing cash on online gambling and betting may make lenders think you are a risk to lend money to. If this is the case then see if you can do without these for at least 6 months so you can boost your mortgage affordability before your mortgage application.

Your Credit score

Every Mortgage lender will check your credit score to determine your mortgage affordability and whilst you don’t know exactly what they are looking for, it is important your credit file looks good.

You can get your free credit score with Huuti and see exactly what is holding your mortgage affordability back and what to do. E.g registering on the electoral roll, reporting your rent payments etc.

Some ramifications can take up to 6 months to fix so it is best to correct them instantly.

Another important tip is to avoid making any new credit applications 6 months before your mortgage application as this can negatively affect your credit score.

Firstly each time you apply for a loan, a footprint is left on your credit score lowering it for a period of time.

Secondly, another loan will show that you are increasing your monthly liabilities and mortgage lenders may not take kindly to this.

Your credit commitments

Mortgage lenders may look to see how many exisiting credit commtments you have.

If you have too many then they may be unwilling to lend to you as this may mean you could potentially struggle to keep up on your mortage repayments.

Your mortgage affordability can be managed with careful planning.

John Bate

John has 22 years of experience in financial services. This spans across financial research, financial services (As a qualified mortgage broker and underwriter), financial trading and sales at global investment banks. While working as a publishing research analyst, he covered European bank credit and advised institutional clients on investment strategies at both JP Morgan and Societe Generale. John has passed all three levels of the CFA (Chartered Financial Analyst) programme.