How do mortgage affordability assessments work?
When you apply for a mortgage, naturally the main thing you’ll want to understand is how much you’re able to borrow.
As borrowing a large amount of money is a risk both for you and the lender, it’s important to ensure that you can afford the repayments for the duration of the term of the mortgage. Therefore, one of the first steps in the mortgage application process is an affordability assessment.
What is a mortgage affordability check?
Generally, in order to complete an affordability assessment, a lender will review how much you earn (your income) and how much you spend on bills and other regular payments (your committed expenditure). This is the same whether it’s a joint or sole application.
What are your incomings?
As part of this, you’ll be asked to provide proof of income; if you’re an employee, this normally means copies of your last three payslips, your most recent P60 and copies of your last three bank statements. If you’re receiving any other income, such as from a part-time job, child-support from an ex-partner or any benefits, you’ll be asked to provide proof of these as well.
If you’re self-employed, you’ll usually be asked to provide three years of audited accounts, signed off by a qualified accountant, two years of your SA302 or the equivalent tax computation from your accountant, and Tax Year Overviews. You’ll also be asked for bank statements for the last three months for both your personal and business bank accounts.
The next step is to document all of your outgoings. That’s because the lender will need to ensure that your outgoings aren’t so high that a monthly mortgage payment would cause you financial hardship.
What are your outgoings?
You’ll be asked to provide details of how much your bills are each month, including your Council Tax, utilities, mobile phone and any insurance policies you may have in place. You’ll also be asked about any credit card or store cards, personal loans or car finance agreements you may have, and if so what any outstanding balances are. Childcare costs and any school fees are also taken into account, as are any maintenance payments you may be paying for children or an ex-spouse.
Stress-testing your finances
Another key part of the process is the ‘stress test’, which means that the lender will check to ensure that you can still afford the mortgage payment should the interest rate increase, or if your circumstances change. For example, if you were to have a child or to go from two incomes down to one.
Whilst all of this can sound daunting and time-consuming, it’s worth remembering that affordability assessments have been designed to ensure that the amount you’re loaned can be comfortably repaid so that you don’t end up in financial difficulties. You can help to speed up the process by getting yourself organised before your mortgage appointment with all the documentation you need. Also, don’t forget that it will all be worth it in the end, as once you know how much you can borrow, the really exciting part can start…house shopping!
To find out more about applying for a mortgage, please feel free to get in touch with our friendly team of mortgage advisers - no question is too big or small.