Understandably, the first thing you’ll want to know when you apply for a mortgage is how much you will be able to borrow.
Find out below how this is worked out and get familiar with the terminology you will need to find your dream family home.
What is a mortgage affordability check?
When completing an affordability assessment, the lender will review how much you earn (your income) and how much you spend on bills alongside any other regular payments (your committed expenditure). This is the same whether it’s a joint or sole application.
You’ll then be asked to provide proof of income. For employees, this normally means copies of your last three pay slips, 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. Outgoings are simply how much your bills are each month. This may include 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 of course what the 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
Next 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. This is called stress testing.
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. So, whilst this can sound daunting and time-consuming, it is worth the effort. You can help to speed up the process by being extra prepared before your mortgage appointment with all the right documentation. And remember it will all be worth it when you can finally get the mortgage agreed and start that all important house shopping.