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What does ‘mortgage affordability’ mean?
If you’re thinking of applying for a mortgage, you may have heard the phrase ‘Mortgage Market Review’ quite a lot. You may also have heard how it requires you to answer in-depth questions on your spending habits and even your plans for the future.
But why is this? Well, it’s all a way of checking your “mortgage affordability” – whether you can afford the mortgage you’ve applied for. Our blog takes a closer look.
Time for a change
The Mortgage Market Review was published in 2014 by the FCA (the financial regulator). It outlined a new set of guidelines for mortgage lenders to follow to ensure that those that apply can afford their mortgage. These included the requirement to closely look at how much money a borrower has coming in each month and also what they have going out (more on this later).
Mortgage lenders must also test whether a borrower would still be able to make their mortgage repayments if interest rates rose by a few percent. And, borrowers can even expect to be asked about what plans they have for the future, as this too could impact on their finances and their ability to make their mortgage repayments.
Let’s look a bit closer at what you can expect to be asked, and why.
Questions, questions, questions
Lenders do their best to make sure you won’t struggle to keep up with your mortgage repayments by looking at what’s known as your “mortgage affordability”. This means going through things like your most recent wage slips and bank statements to see how much money you have coming in and going out each month. They do this to form an idea of how much money you have spare at the end of the month to cover your mortgage repayments.
Falling behind is bad news for both you and your lender, which is why you’ll be asked quite a few questions about your spending habits in your mortgage interview. Lenders are likely to ask you things like how much you spend on living costs such as food and clothes but also items like alcohol, whether you gamble and even how much you spend on haircuts each month.
The questions will be quite in-depth, and they may ask how many children you have or whether you have plans to have children in the future. Kids can be expensive, and will certainly have an impact on your financial situation.
Lenders will also want to get to grips with your ability to manage money, and may ask if you have ever taken out a payday loan.
It may seem like some of these questions are unnecessary and invasive, but your lender simply wants to make sure you’ll be comfortable making mortgage payments. Not only do they want to check you can fit a mortgage repayment in your budget at the end of the month, but they also need to reassure themselves that you can carry on paying even if your situation changes and you have less disposable income. Or, if an interest rate rise makes your repayments more expensive.
Why this is important
Ultimately, these questions are to help both you and the lender. If you take out a mortgage that you quickly find you can’t afford, the lender loses out as they have to carry out legal proceedings to get the money you borrowed back. At the same time, you lose out because you end up in debt to a lender and – in the worst-case scenario – you may end up losing your home.
So, while it may seem a little over-the-top or irritating at the time, these checks really are important. You must always be honest with your answers, and that way you know that you’ll get the mortgage that best suits your situation and doesn’t cost you more than you can afford to repay each month.