How do mortgage affordability assessments work?

How do mortgage affordability assessments work?

Before handing over a large sum of money, lenders want to know that you are not at risk of defaulting on your mortgage. They want to know that you will be able to pay it back, and that you are not at increased risk of being unable to repay your debts.

In order to decide if you are likely to be able to repay your mortgage, lenders carry out affordability assessments. During this process, they will dig into your finances to learn more about your past behaviour. They will also look at factors such as your savings and employment to determine if you are likely to be able to continue making your repayments.

Why are affordability assessments important?

Affordability assessments are not only beneficial for your lender, they are also useful for you. These checks will help you to avoid getting into debt that you will be unable to repay. It can also help you to identify weaknesses in your finances that could hurt you in the future.

What is involved with affordability assessments?

What is involved with affordability assessments?

Every lender is different and they will all have their own assessment checks. The checks will also depend on things like your employment status and current financial commitments. Here are the main categories of payments that you can expect to be scrutinised as part of the mortgage application process.

Income

Lenders start by looking at your sources of income. If you are employed full time, this is simple enough to achieve as you will have a monthly salary. If you are on a fixed-term contract, lenders might want to know what you plan to do when your contract comes to an end. Rather than looking for future plans, they will look at past behaviour. They might ask about your past contracts and how long you are typically out of work between contracts.

If you are self-employed, you may need to provide more evidence of your income than a salaried employee. Every lender will take a different approach to assessing self-employed income. Some will take the average of the last few years, others will take the lowest of the last few years. This is why choosing the right lender can often have a big impact on your application outcome.

Outgoings

Your current financial commitments will also be included as part of your checks. This includes all of your monthly outgoings, including things like your current rent or mortgage payments, travel expenses, debt repayments and more. If your current finances are quite tight, you might consider reducing your monthly expenses by stopping subscriptions temporarily. 

Stress testing your finances

Stress testing your finances

Once lenders know your income and outgoings, they can start to get a more complete picture of how much disposable income you have every month. This is an important figure, as it shows how much flexibility you have in your finances.

Lenders will then project scenarios such as an interest rate increase or an increase in the cost of living. If your other expenses increase, will your mortgage still be affordable. They want to see that you will be resilient and able to continue making your repayments in the face of financial adversity. 

How can you increase your chances of being accepted?

The best way to reduce the chances that your application will be rejected is to be prepared. Getting to grips with aspects like affordability assessments is an excellent place to start. By anticipating the next step in the application process, you can be better prepared for what lies ahead.

What are some red flags for lenders?

What are some red flags for lenders?

Lenders are trained to look for common red flags in financial behaviour. By avoiding these common mistakes, you can reduce the risk that your application will be rejected.

  • Try to avoid going overdrawn at the end of the month. This can demonstrate poor financial planning and frivolous spending in the start and middle of the month.
  • Avoid borrowing money from people in the short-term. If there are often transactions at the end of the month that are returned within a few days, this can look like poor financial planning.
  • Avoid gambling websites, even if you don’t have a gambling problem. All gambling will be seen as problematic to lenders.
  • If your friends send you money for any reason, ask them to put a sensible description. It’s common for people to include funny descriptions when sending money, but some lenders will raise this as a red flag.
  • Show evidence that you are still saving. You might have hit your savings target for your deposit, but don’t stop there. By continuing to save, you can demonstrate excellent financial responsibility. These savings will also be helpful for managing unexpected costs during the home buying process.
  • Try to avoid switching jobs or searching for a new job while you are applying for a mortgage. Some lenders will want you to have passed your probationary period in your role. 
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