How affordability is calculated
When applying for a mortgage, lenders will work out how much you are able to borrow by calculating your income against your outgoings. Generally, the more outgoings you have, the less you can borrow. Having a large income with low outgoings is the best situation you can be in.
If you are serious about getting on the property ladder, it’s advisable that you cut back your spending at least three months prior to your affordability assessment, as the lender will look back at your bank statements to see what your spending habits are like.
How an Affordability Assessment works
To assess your affordability, the lender will ask to see your last three pay slips to ensure you have a main source of income. If you have a second job or means of income, you will need to provide documentation for this as well.
Some questions you will be asked include;
- What’s your annual income?
- Do you have a second source of income? (e.g. investments)
- What are your outgoings, excluding anything you wouldn’t consider giving up if you were to get the mortgage?
- Do you have any dependents or pay child maintenance?
- What are your travel expenses? (e.g. car)
- Do you have any debt, including credit cards and personal loans? If so, what are the monthly repayments?
See how much you can afford at a glance with the affordability calculator. You need to think about your monthly repayments and if you could still afford them if interest rates increase.
How to increase your chances
One of the best ways to increase your affordability is saving a large deposit. The more money you can put down at the start, the less you need to borrow. Often, parents gift their children their deposit to help them get on the property ladder. If you are not that fortunate, there are plenty of government alternatives available to you.
To boost your chances, you also need a good credit score. It’s not always advisable to get a credit card, but putting your petrol and food bill on a credit card and paying it off monthly can help.
Lenders will ‘stress test’ your financial situation, too. This will hypothesize the effects of lifestyle changes, such as redundancy, taking a career break, illness, having a baby, interest inflation and so on. It’s crucial that you plan and know how you will meet your repayments in these instances.
Lenders will ‘stress test’ your financial situation, too. This will hypothesize the effects of lifestyle changes, such as redundancy, taking a career break, illness, having a baby, interest inflation and so on. It’s crucial that you plan and know how you will meet your repayments in these instances.