Mortgage affordability: what lenders check, and how to prepare
If you're a first-time buyer, or it's been a while since you last had to apply for a mortgage, you could be in for a shock. Lenders can now ask about your spending habits in eye-watering detail.
This is because of the new mortgage affordability checks that came into effect in April 2014.
Anyone applying for a mortgage must now go through these checks, whether you apply over the phone (e.g. if you call a lender about a deal you've seen in our mortgage comparison tables) or you use a mortgage adviser.
This guide is to help you prepare for the process, so you can understand what you'll be asked, and what your answers might mean to the lender. We've spoken to industry experts and people who have recently been through the process, in order to show how different mortgage lenders vary in their approach – and one way you can shortcut the guessing game.
First, a bit of background on what's changed since 2014 and why. If you already know about this, skip to the affordability checks in detail section.
What's changed? New mortgage affordability rules since 2014
It used to be relatively simple to work out what size of mortgage you'd be approved for. Lenders would work this out using a rule of thumb known as the income multiple. They would multiply typically 3.5 × your total income and assume that you could afford the repayments on that sort of sum. The multiple used to vary between lenders; some would offer 3.5, some four and some up to five times your income. If you knew which lenders used which multiples, you knew roughly how much you were going to be able to borrow.
All that changed in April 2014 following a Financial Conduct Authority (FCA) initiative called the Mortgage Market Review (MMR). This put the onus on lenders to actually check your financial situation to make sure mortgage payments are affordable – and not only at the present rate of interest, but also if interest rates rose. This is called a “stress test”, and involves checking whether you could afford a mortgage with a higher interest rate. Some lenders are testing rates as high as 7%.
The fact is, there are no firm-and-fast mortgage affordability rules. How exactly the affordability checks are carried out, and how the results are used to determine how much you can borrow, are up to each lender.
But don't worry – the onus on affordability is there to make sure lenders act responsibly, not to lock you out of the mortgage market. There are several things you can do to prepare your finances and help you get the mortgage you want. This guide will help you prepare.
First let's cover what you're likely to be asked.
Many of the questions you will be asked are fairly straightforward, but some could cause you problems if you're not prepared for them. Here are the four main areas you'll be asked about.
1. Questions about your income, retirement plans and family situation
In addition to the usual personal information – name, age, where you live, etc. – you can expect the lender to ask you about the following:
- “How long would you like to repay the mortgage?”
This has a direct impact on affordability. The typical mortgage term for comparison is 25 years, but if you want to repay it over a shorter (or longer) term, your monthly payments will be higher (or lower). In all likelihood the lender will impose a minimum term, but as a starting point it helps them to know how long you have in mind.
- “When are you thinking of retiring?”
The lender wants to know the likelihood of your income changing in the near future, and how many salaried years you have to pay the mortgage off. If you're planning for the mortgage repayments to last beyond your retirement date, expect detailed questions on your pension plans.
Some lenders will be satisfied with evidence that you're saving for a pension, while others will want more assurances that you'll be able to afford the repayments into retirement.
- “Tell us about your income…”
If your main income is from a salary, this should be straightforward. The mortgage lender might accept just your latest payslip as evidence of income. If you want bonuses, overtime, commission, or any other income to be considered, a lender will often ask for evidence of this over a longer period – six months in some cases.
But it's the detail that can often throw up surprising challenges. Katie, who is remortgaging after renovations, said:
My employer operates under a couple of different trading styles, so the company name on my payslip didn't match the employer name I gave to the lender. My employer had to write to the lender to clear it up which slowed things down. They also needed proof that I'd really spent money on renovating the house, not just treating myself!
Tom, who remortgaged for a better rate, said:
My wife is a stay-at-home mum so we declared zero income for her. Despite this, the process was delayed by a week because the lender kept asking about her income.
- “How many children do you care for? How old are they?”
Childcare is a significant expense for many – between 2010 and 2015, the cost of nursery for a child under two increased by 32.8% – so it's easy to see why lenders will ask you about it. The problem is that a “computer says no” approach can often cause frustration. First-time buyer Jamie told us his experience:
Our daughter is three so she'll be starting school in a couple of years, but lenders assumed we'd continue to pay our current childcare costs for the duration of the twenty-five year mortgage term. When I questioned this, they said it was down to inflexibility in the computer system. Eventually, our adviser sorted it out – but it shows the kind of misunderstanding that can arise.
For more detail on how lenders approach childcare costs, see below.
2. Questions about your bills and regular outgoings
Of course, one of the main factors affecting how much you can borrow will be what's seen as your fixed monthly outgoings. In a mortgage affordability interview you can expect to be asked how much you spend on:
- Utilities (gas, electricity and water bills)
- TV and phone packages
- Council tax
- Insurance (life, home, car, pet etc.)
- Essential travel (such as getting to work)
- Housekeeping (e.g. food, toiletries etc)
- Any maintenance for a child or spouse
- School or college fees
- Regular saving and investment contributions
Again, the way this works in practice will vary between lenders, and you may find yourself guessing the answers to some questions. First-time buyer Paul said:
They asked me what the council tax would be on my new property, which I didn't know. A lot of the time it felt like I was plucking figures out of the air, so it didn't feel that useful.
Pension contributions are something else you are likely to be asked about – and lenders also have very different attitudes towards them. If you're contributing to a pension, some lenders will view this as part of your “committed expenditure” – meaning it will affect your affordability. However, at least one mainstream lender views it in a completely different light, as a positive indication that you're providing for your retirement, and so may be prepared to offer you a mortgage term that extends beyond your planned retirement date.
3. Questions about debts
The cost of any existing debts can play a big part in a mortgage affordability assessment. Lenders will ask you about outstanding balances on the following:
- Any other mortgages or secured lending
- Personal loans and hire purchase agreements
- Credit card balances
Karl Griffin, of specialist remortgage advisers The Better Mortgage Company, highlights credit cards as a potential sticking point for borrowers:
Mortgage lenders will make a judgement of affordability based on outstanding balances. Most lenders use a percentage of the total outstanding balance in their affordability calculation so a lower balance is favourable. Also, many lenders will ask whether a credit card will be repaid in full before the mortgage completes. Customers who can answer “yes” to this question are typically able to get a bigger mortgage.
4. Questions about your lifestyle and money management
Along with the above, you will probably be asked about “lifestyle costs”, which can mean very different things depending who you're dealing with. For example one lender may ask you how much you spend on subscription services (such as Netflix and Spotify) while others may not. Don't be alarmed if the questions get personal!
Seriously just asked in a mortgage review 'could you live without your contact lens' if money was tight?!! #mortgagemadness— Rob Griffin (@rwgriffin) August 26, 2015
Ultimately, lenders are looking for evidence of good money management. They will be interested in any recent changes to your spending habits, such as payments to gambling companies, large one-off payments or significant increases in credit card balances.
As long as you can explain any atypical expenditure and you're not making frivolous purchases or going regularly overdrawn, it shouldn't be a problem; just be aware that each lender will approach this differently.
Approaches to childcare costs can vary wildly between mortgage lenders. Karl Griffin explains:
The vast majority of lenders will look at your specific childcare costs. This can sometimes take tens of thousands off the total amount that the bank is willing to lend. However, a few well-known lenders have a 'standard assumption' of the cost of childcare – this can often work in favour of customers seeking larger mortgages.
How different lenders approach childcare…
As with other affordability criteria, inconsistency between lenders is a big source of frustration for borrowers. Here's how some of the bigger banks deal with childcare costs:
- RBS and Natwest: if you tell them you have children, they will assume that you're paying a certain amount for childcare but won't take it into account when assessing your affordability
- TSB, Lloyds, Halifax and Bank of Scotland: will take childcare costs into account when assessing your affordability
- Nationwide: asks for your individual childcare costs, and assesses them as part of your wider income and spending.
If someone regularly looks after your children for free – such as a grandparent – make sure you mention this, as it could reduce your monthly expenditure in the lender's eyes. However, lenders will probably check the information you give them, so don't be tempted to say that grandparents regularly help out if they live 50 miles away!
What evidence will you need?
When preparing for a mortgage interview you'll need to gather together:
- Payslips and proof of other earnings for the last 3 to 6 months. If your income is variable and includes bonuses, you might also need to show your employment contract
- Bank statements
- Credit card statements
- Proof of any savings or assets you hold
- Utility bills and details of how much you spend on council tax, insurance etc
- Proof of identity and address (if you've been at your current address for less than 3 years lenders will also want details of previous addresses)
- Details of your current mortgage if you have one
Not every lender asks for all of these. Some lenders might not ask to see bank or credit card statements at all. There are few hard and fast rules; our suggestion is simply to be prepared.
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4 actionable steps to prepare your finances for mortgage affordability questions
- Trim your fixed costs. Make a budget and see if you could be managing your money better. If you can reduce some outgoings this could radically improve what you can borrow.
For example: with one well-known high street mortgage lender, reducing monthly costs by £100 added almost £10,000 onto the potential loan amount offered.
- Check your direct debits and make sure you're not still paying for services or memberships you've stopped using.
Two obvious benefits: not only will this improve the amount you could borrow by reducing your "frivolous spending", it will also save you actual money as well.
- Pay off credit card or loan balances as much as you can before you apply.
Griffin explains: "One of the best things you can do to improve your chances of getting the mortgage you need is to reduce your overall borrowing. Even in cases where borrowers have a good income and some savings, a large credit card balance or loan commitment can make the difference between being accepted or declined by many lenders."
- Carry out your own stress test: Could you cope if interest rates were, for example, 2% higher than the deal you want to apply for?
Use our mortgage calculator to estimate your monthly payments for a range of possible interest rates. If a jump in interest would stretch your monthly budget, you're unlikely to sail through affordability checks.
How to shop around for the right mortgage lender
Remember, lenders are competing for your business. The mortgage affordability questions aren't meant to be a barrier; they're simply the lenders' effort to play by the rules. So just as you should shop around to make sure you get the lowest rate, you can also shop around for the most favourable view on what size mortgage you can afford.
When comparing lenders you have two main options: go direct or use an adviser (also known as a mortgage broker). Here's how these routes compare:
1. Going directly to lenders
- First, compare today's mortgage deals to find the 5 best rates for the type of mortgage you want. In our mortgage comparison tables you can call some lenders directly. At this point you are looking to speak to their in-house adviser team (they may put you through, or arrange to call you back).
- In this first discussion the lender will run through their mortgage affordability questions, which usually takes around 45 minutes. This is in order to provide you with a decision in principle. Some lenders do this step online.
- If you're offered a mortgage decision in principle, you will almost always need to speak to the lender's own mortgage adviser, which is likely to involve either another 45-minute phone call or an in-branch appointment.
There is nothing to prevent you from speaking to more than one mortgage lender at once, and comparing their affordability criteria and what they are willing to offer you. The drawback is simply the time and effort involved in repeating the exercise for each lender.
Tip: check with each lender what impact their decision in principle will have on your credit rating. Some will only carry out a credit search, which shouldn't negatively affect your credit file. Others will leave more of a footprint, and too many of these can look like numerous rejected applications, which will negatively impact your credit rating.
The alternative to going direct is to use a mortgage adviser.
2. Using a mortgage adviser
A mortgage adviser is an intermediary who connects borrowers and lenders, and therefore aims to save you time, money and hassle when arranging a mortgage. Their experience and insight into the industry can often work to your advantage; they are familiar with the affordability criteria of different lenders, they can help you to choose the best deal for you, and can advise on how to boost your chances of being accepted.
Given the sheer number of affordability questions many lenders now ask, the big advantage of using a mortgage adviser may now be the time you save. Having gone through all your details, an adviser can approach several different lenders on your behalf, whereas speaking to four lenders yourself would mean around four hours' worth of phone calls – and you still can't know for sure whether those are the best four mortgages you could get.
Some mortgage advisers also offer a check back service; after you've had an offer, they'll let you know if anything better has come onto the market in the meantime.
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Last updated: 26 January 2016