What is an affordability check?
Also known as an ‘affordability assessment’, an affordability check is conducted by the mortgage provider to see whether you can afford the mortgage repayments. It’s part of the process you have to go through when you apply for a mortgage.
The provider will ask for evidence of all your income and outgoings, including:
- your salary or self-employed earnings
- your current rent or mortgage payments
- regular bills and council tax
- any debts you have
- non-essential outgoings, like entertainment subscriptions
They’ll take all these factors into account when assessing how big a mortgage they’re willing to offer you, to make sure you don’t overreach yourself financially.
What size mortgage can I afford?
Your mortgage affordability depends on the outcome of your affordability check. Once this has been carried out, your mortgage provider will tell you the maximum amount they’re willing to lend you - and how much your monthly repayments would be including interest.
Bear in mind that you don’t have to apply for the whole amount you qualify for as this could lead to you overstretching your finances, especially if your circumstances change in the future.
Each mortgage provider uses their own criteria, but generally speaking, they tend to consider these five major factors when deciding how much you can afford to borrow:
1. Your salary
Mortgage providers may use mortgage income multiples when deciding how much to lend you. For example, they tend to multiply your salary by up to four-and-a-half times your annual income to calculate a maximum mortgage amount (including the income of anyone else you’re applying with).
Essentially if you have a higher salary, you’re more likely to come across as somebody who can afford larger monthly repayments. So, you may be offered a larger mortgage as a result.
Bear in mind, this is only one of the factors mortgage providers take into consideration, so you won’t be offered a mortgage based on your salary alone.
2. Income and outgoings
Each lender will carry out their own mortgage affordability checks to make sure the mortgage is suitable for your budget and individual circumstances. Your affordability is based on the ratio of your income to outgoings (e.g. household bills and debts).
To improve your affordability, you could look at reducing your non-essential expenses, such as:
- going out for dinner or ordering takeaways
- buying coffees when out and about
- subscriptions that you don’t use often
While you may want to be offered the largest mortgage possible, it’s important to give a realistic impression of what you can afford. Otherwise, you could risk financially overstretching yourself, especially if your circumstances change in the future.
3. The size of your deposit
The higher your deposit, the less you’ll need to borrow in the form of a mortgage. And so the lower your loan-to-value (LTV) will be. This should increase your chances of getting accepted – and with lower interest rates.
Loan-to-value (LTV) relates to the value of the property you’re looking to buy versus the mortgage you need to buy it. This ratio is usually expressed as a percentage.
For example, if you have a 15% deposit, then you’ll need to get a mortgage to cover the remaining 85% of the property’s value. This means you have a loan-to-value of 85%.
With a substantial deposit, you should appear as low risk to lenders, as there’s less chance of you going into negative equity (where you owe more than your house is worth).
4. Credit history
When you apply for a mortgage, lenders check your credit history. They want to see if you have:
- a good credit score
- a good payment record
- serious negative markers (like defaults, CCJs or bankruptcy)
Having missed and late payments or negative markers on your credit report can impact your chances of getting accepted. If you’re struggling to get a mortgage because of debt, it might be better to focus on paying off your outstanding balances before applying again.
Paying off debt on time, every time, will help to build up your credit score and show lenders that you’re a responsible borrower – meaning you may have a better chance of being accepted in the future.
If you’re facing financial difficulty, consider getting free confidential advice from StepChange, a UK based debt charity.
5. Future changes in circumstances
In the future your financial circumstances may change for the better or worse. For example, you might:
- get a new job with a higher or lower salary
- lose your job
- have a baby
- take a career break
It’s important that you future proof your mortgage to ensure you can keep up with your repayments if your circumstances take a turn for the worse. Mortgage lenders consider these factors, as well as rising interest rates, when deciding how much to lend you.
How to calculate mortgage affordability
You can estimate your mortgage affordability using these three methods:
Make sure you fill in the information honestly to get an accurate estimation of how much you can afford. You may not have to provide proof of income and expenses now, but you will when you come to apply for a mortgage.
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