Mortgages are a great way to get on the property ladder but we need a good understanding of them for us to plan effectively. Mortgage lenders now have stricter criteria when considering people for mortgages. You should work out your own mortgage affordability and try to improve this as your first step to getting on the property ladder.
How Mortgage lenders work out your mortgage affordability
Mortgage lenders used to bases your affordability solely on a multiple of your income. This practise is still in place but really serves as the first step in a more detailed analysis of your financial life. The multiple being used is 4.5 of your income.
Mortgage lenders will look at your monthly income and expenditure to determine how much you have left as disposable income per month and if this is sufficient to pay for your mortgage and still have funds to live off every month.Most of these stricter changes to how mortgage lenders assess your affordability were brought into play in 2014 after the FCA's mortgage market review
Mortgage lenders don't only look at the “now” but stress test your ability to cope with your mortgage repayments if interest rates rose.
You can use a mortgage affordability calculator to see what you will currently afford and who will lend to you.
Mortgage lenders will also look into how different factors might affect your financial life and then determine how much they are willing to lend to you due to the probability of any of those factors occurring.
They look into:
- Childcare costs
- Financial emergencies
- Death of a financial sponsor
- Loss of employment
- Career break
You can use a mortgage stress test calculator to see how a rise in interest rates will affect your ability to repay a mortgage or how it will raise your proposed mortgage repayments. You can greatly increase your mortgage affordability by pre-qualifying for the host of government schemes out there and choosing one which you can remain eligible or until you are ready to =buy your house.
What lenders look at when working out your mortgage affordability
Mortgage lenders will look into you annual income.
- Your regular income
- Any bonuses you might be eligible for
- Any side jobs you have which produce an income
- If you are a contractor then your weekly income and contract terms if any
- Any benefits you receive from the government
- If you are self employed then your business accounts
- Any income you have through savings or investments
- Any overtime which you take
- Any commission which you regularly make
You will need to provide evidence of any income which you want the mortgage lender to consider.
Mortgage lenders will also look into any future changes that may affect your income
- If your wife, husband or civil partner loses their job
- If you fall very ill and can't work for years
- If your investments fail or lose all their money
- If you have a child
In this cases the mortgage lender will like to see what you are doing to mitigate the financial impact of any of these things affecting your mortgage repayments. This is especially the case if you are at risk of these issues.
Mortgage lenders will also look into your expenditure
- Your monthly expenditure
- Any debts you have, how much they account for and how old they are
- The amount of tax you pay
- How much you spend on essential costs and on lifestyle costs
- If you gamble
- Your credit cards
- Your household bills
- Your car payments
- Any insurance you may have
- Any childcare payments
The mortgage lender will want to see bank statements as evidence for any figures you put down.