The subject of affordability has been on the lips of every underwriter since the inception of the Mortgage Market Review and the subsequent European mortgage regulation. It is the main factor in approving any mortgage and is something we should all be prepared for.
On the face of it, affordability is not overly complicated. You calculate the client’s annual income and then deduct expenditure. This will provide a figure that, when the mortgage is stress tested, demonstrates what a client can afford per month/year.
Let us first deal with the stress test.
There is an expectation, whether you agree or not, that interest rates will increase at some stage. This would have a detrimental effect on all borrowers currently benefiting from very low interest rates. To account for this, lenders stress test mortgage payments at anything up to 6 – 7% interest rate to check that you can still afford your monthly mortgage payments if rates rise.
Income is easy to demonstrate; just make sure that you have your up to date pay slips, company accounts and for the self-employed, SA302’s.
Be aware of deductions from your salary. Things like pension contributions and child care vouchers are an expenditure that will reduce your available income.
There are 3 types of outgoing that lenders are concerned with:
Committed expenditure – for example loan repayments, insurance, credit card payments
Essential expenditure – utility bills, nursery/school fees, food and drink
Quality of living – holidays, meals out, gym membership
Lenders are mainly concerned with committed and essential expenditure and will cross reference most of these costs from your bank statements and pay statements so be prepared for this scrutiny.
Before you start the mortgage process it is good to review your personal outgoings and see if there are any changes you can make. Pay off unsecured debt where you can. Loans with under six months to run will not affect your affordability nor do credit cards with a zero balance. Check all your direct debits and standing orders and make sure they are all correct and have an understanding what you spend per month and if you can make any changes.
It makes little difference to lenders how much equity you have in your property. If you're looking for a £100,000 mortgage secured against a £900,000 property, you could access the best interest rates on the market but you would still need to demonstrate you can afford the cost of the mortgage.
Best advice is always to speak to a mortgage broker. We can explain what you can afford by doing expenditure calculations and once a suitable lender is selected, provide a decision in principle. We will also advise on what you can do if the decision in principle is lower than expected.
If in doubt ask.