Figuring out how much you’re able to borrow is an essential part of the mortgage process. Whilst it may seem a little daunting, getting an accurate picture of your finances will tell you what you can afford to pay back each month. It’s important not only for the mortgage lender, but for your own peace of mind too.
Calculating your mortgage affordability used to just involve taking your annual salary and multiplying it by three. The resulting figure would equal the amount you were allowed to borrow.
However, that was before the 2008 financial crash. Post-2008, regulations got a bit tighter and mortgage lenders took a little more time and care when it came to issuing mortgage loans. This resulted in the Affordability Assessment.
Each lender will have their own specific criteria when it comes to an Affordability Assessment, but in general, they look at three main things.
The three main parts to calculating mortgage affordability
- Your income
Here, a mortgage lender will look at how much money you’ve got coming in each year. They’ll want to know:
- What your annual salary and monthly take-home pay is
- If you receive any benefits
- Whether you have any second jobs or part-time work income
- Any declared property income
You’ll need to provide a few months worth of payslips and bank statements as supporting evidence. If you’re applying for a mortgage with a partner they’ll look at their income too.
Things can get a bit more tricky if you’re self-employed. In this instance, you’d need to show at least two years worth of “proof of income.”
- Your outgoings
Next, your current outgoings will be looked at to see how much you’d be able to afford in mortgage repayments. A mortgage lender will look at things such as:
- Existing direct debits (things like Netflix, your phone contract etc)
- Whether you have any childcare costs
- Current debts (so things like credit cards, loans repayments, car repayments or another mortgage)
- Insurances (personal, life, buildings and contents)
This will give you and your mortgage lender a better idea of your current commitments and what you could afford to pay in mortgage repayments each month.
- The results of something called a ‘stress test’
Less important but still considered is something called a stress test. This is a conversation in which a mortgage lender tries to determine whether you could still afford to repay your mortgage if your circumstances change. So for example would you be able to cope:
- If the interest rate increased?
- If you or your partner lost your job?
- If you were unable to work due to an illness?
Rather than refusing you a mortgage, a lender may advise you to take steps to ensure you’d be okay. For example, getting life insurance or critical insurance cover.
Mortgage affordability isn’t about mortgage lenders trying to trip you up or catch you out. It’s designed to give you a clear idea of what you can realistically afford to pay back each month. And it gives the mortgage lender peace of mind that you’re unlikely to default on any payments.
Looking for a mortgage? Contact us at TaylorMade Finance. As mortgage brokers in Manchester, we’ll gather as much information as possible from you to ensure that we get you the very best deal we can and only approach lenders we know you’ll have a good chance of being approved by. We also have an online mortgage calculator which can give you a rough idea of how much you could borrow and what your monthly repayments might look like.
