We’ve talked a lot about mortgage affordability checks in our articles and what the rules are when you’re applying for a mortgage, but we wanted to put a quick reminder together on what you should expect.
So, in this article, we’re answering your questions about what are the UK mortgage affordability rules and why you need to take note of them.
Wait, I thought the Bank of England scrapped the affordability tests for mortgages?
Yes, we haven’t forgotten. On the 20th June 2022, the Bank of England announced that they are withdrawing their mortgage affordability stress test recommendations.
The recommendations before this point for lenders to assess individual mortgage viability were:
- A stress interest rate for lenders is imposed when assessing prospective borrowers’ ability to repay a mortgage. Specifically, that meant testing whether you could still afford your repayments with a 3% mortgage rate increase above your lender’s standard variable rate.
- The loan to income (LTI) ‘flow limit’ limits the number of mortgages that can be extended to borrowers at LTI ratios at or greater than 4.5.
The Bank of England is specifically removing the requirements for a stress test but keeping the recommendations for LTI caps to remain.
The bottom line is always that affordability is a crucial deciding factor for lenders. It’s a requirement by the Financial Conduct Authority (FCA) that lenders assess whether an applicant can afford to repay their loan.
So with the need for a stress interest rate scrapped, what mortgage affordability checks can you expect?
What are the current UK mortgage affordability checks and rules?
For starters, a mortgage affordability check is a lender’s calculation of how much they would be willing to lend.
It’s worth noting here that every lender has its own set of criteria that you need to meet. Working with an experienced broker who knows the market and their lenders means that they will have already checked if you meet a lender’s criterion.
Factors that a lender goes through when they’re deciding what, if and how much you could borrow, aka their affordability rules:
- Income, lenders will cap to 4.5 times your income
- Your income type will be assessed. This is because not all lenders are the same and may not take a view of your entire income especially if you earn overtime or are self-employed.
- The value of the potential property
- Your deposit amount
- Your affordability in comparison to your outgoings
It’s worth noting here that we’ve missed credit reports from this list. There’s a reason for that. Whilst it plays a role in the ultimate decision a lender will make, determining how much you can borrow is a separate process to a credit review.
How do lenders work out how much I can afford on a mortgage?
The most basic way a lender can work out your affordability is to use an income multiple. The average multiple a lender uses is 4-4.5 x your salary.
However, as we’ve said, each lender has their own criteria so some may only offer 3 x your income.
But, as the list above suggests, this is only one part of the mortgage affordability puzzle.
What’s more, is that these factors can directly affect your mortgage affordability and indirectly affect your application.
Key direct factors to consider would be:
- Debt – If you’re paying off large amounts of debt it can reduce the amount a provider is prepared to loan. Think about how much your debts account for your outgoings. If monthly repayments are over 50% of your monthly income it’s considered to be a large debt and will have a greater impact on your affordability checks. Typically lenders use a debt-to-income ratio (DTI) when assessing any outstanding debt you owe. Ideally, you’d want to be around the 20-30% mark.
- Outgoings – What are your monthly outgoings? We’re talking about bills, food, travel, childcare, leisure activities etc. Having high monthly outgoings means your lender will likely offer you less than you need. Lenders’ assessments of your outgoings will be made by reviewing your bank statements.
Indirect factors to a mortgage affordability checks:
- Type of employment – Yep, it’s not just based on how much you earn, but how you earn it. That means whether you’re an employee, self-employed, a contractor, a doctor or a director. There will be strict criteria and rules depending on your employment status, which will differ depending on the lender.
- Source of income – There can be different definitions between lenders about what they accept as income. Here, we’re talking about commission, dividends, bonuses and overtime. This can also affect locum doctors who have varying hours and gaps in employment.
- Credit history – Your credit history gives lenders an overview of your financial history. A poor credit record can affect how much you can borrow and whether some lenders are willing to lend to you. You should download a copy of your credit files before any application and check them over to make sure there are no errors or make improvements. It probably goes without saying, but the better your credit score the better your mortgage prospects are and the rates you could be offered. If you do have any credit issues such as bankruptcy or county court judgments, not all lenders will consider your application. This is when you need to speak to an expert in bad credit mortgages.
- Loan-to-value (LTV) – LTV is the percentage of the total price of the property you want to borrow. For example, you want to purchase a property at £200,000 and want to borrow £180,000 as a mortgage. Your application would be a 90% LTV. Lenders will differ on how high they set their LTV limits but it’s worth noting that the lower your LTV the better the rates may be.
- Profession – Some lenders will offer higher income multiples if you fall within a specific list of professions, such as doctor or lawyer.
- Type of mortgage – The type of mortgage you are looking for will have an impact on your applications. This could be buy-to-let, second homes, bridging finance or re-mortgaging. They will all have a slightly different way to assess your affordability. Take a look at our articles on these mortgages for a guide on what to expect if you’re applying for these types of mortgages.
Note – if you’re applying for a joint loan, an affordability check will take into consideration your joint income and outgoings.
How can a mortgage broker help?
A mortgage broker can help you if you’re concerned about mortgage affordability checks and who to approach.
- They have whole of market knowledge so no matter how complex your situation is they will be able to advise you of lenders who specialise in what you need.
- They will give you individual advice. A mortgage is probably one of the biggest financial commitments you’ll make, so having advice that’s individual to you and your situation is important. They can take a look at your income, debts and outgoings to advise you as to what you can do.
Approaching and having a mortgage broker on your side can make the process less of a headache.
They’ll take into consideration your circumstances and work to find and put you in front of mortgage lenders from the whole of market. They know the best lenders to approach, putting you in the best possible position for mortgage acceptance and making the process more seamless.
Contact us at Online Mortgage Guru on 0345 3669799 or email us via email@example.com and we will put you in touch with a suitable specialist to handle your enquiry.