Mortgage affordability – everyone’s favourite pub chat. Or maybe not. It’s the financial equivalent to fitting comfortably into your favourite pair of jeans – you want it to be just right, not too tight, and not too loose! In mortgage terms, affordability refers to your ability to comfortably afford your mortgage payments. Lenders will look at your financial situation, not just to be nosy, but with the genuine purpose of ensuring responsible borrowing and sustainable homeownership.
Here are the key factors looked at by lenders…
Income
First up, your income. Whether you’re waking up every day for the 9-5 grind, or running your own business, lenders want to see proof that you’ve got enough coming in regularly and consistently to keep up with the flow of mortgage repayments. Proof may be payslips if you’re employed, or self-employed and business accounts. Some lenders also consider other sources of regular income like bonuses, commission and rent from investment properties (even lodgers in some cases!).
Expenses
Regular outgoings like household bills, childcare and travel expenses will be evaluated. Lenders want to make sure you’re not spending all your hard-earned cash on ASOS hauls and fancy coffees (we’ve all been there!). The lower your expenses relative to your income, the better your affordability will be. Lenders will also look at things like your gambling expenditure. Hey, we can’t blame you for dreaming about that Omaze house!
Debt
Debt is like that annoying friend who always asks to borrow your stuff but never returns it. Some lenders have a debt-to-income ratio which compares monthly debt payments against gross income to evaluate financial risk. It’s a good idea to lay off the credit cards and clean up your credit score to show them that you’ve got this adulting thing under control.
Credit history
Your credit score is like your financial report card. A good one can open doors faster than you can say ‘mortgage approved!’. A higher credit score and positive credit history demonstrate responsible financial behaviour and can improve affordability. So pay your bills on time, keep those credit card balances in check and avoid any late-night Amazon impulse-buys. Your future self will thank you.
Mortgage considerations
Last but not least, your deposit and loan-to-value (LTV), mortgage term and those pesky interest rates will affect monthly repayments and therefore affordability. Lenders will also stress-test your mortgage affordability to make sure you can still afford the payments if interest rates were to go up 1%, 2% or even 3%. The puzzle pieces of a mortgage deal need to fit together just right fir you to achieve mortgage nirvana.
While it’s not rocket science, mortgage affordability does require a bit of financial finesse. A dash of budgeting with a sprinkle of responsible spending will put you well on your way to living the homeowner dream!