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.
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.
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.
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.
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.
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.
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.
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.