What is a Mortgage Affordability Check?
- Adrian Collins
- May 26, 2023
- 5 min read
Updated: Nov 4
Are you looking to secure a mortgage? One critical step you'll encounter is the mortgage affordability check. This essential check not only helps lenders assess your financial capacity to manage mortgage payments and existing loans but also evaluates lending risks associated with your profile. Understanding the intricacies of an affordability check in the mortgage process can empower you to navigate this crucial step more effectively. In this blog, we delve into what the mortgage affordability check entails, its significance, and how it impacts your path to homeownership.
Understanding the Mortgage Affordability Check
So, what is a mortgage affordability check, and why does it matter to you? Essentially, it’s the process your lender uses to see if you can comfortably afford your mortgage payments. They’ll look at your income and outgoings to make sure you’ve got enough money to meet your monthly repayments without strain.
Your lender will review your financial situation, including your credit history, via a credit reference agency. This helps them understand the risk involved in lending to you. Since you'll be making these payments over many years, they want to be confident you won’t face financial hardship.
In the UK, the rules around affordability checks were strengthened in 2014 with guidelines from the Financial Conduct Authority (FCA). These mean every responsible lender has to thoroughly assess whether you can afford a mortgage before they approve it.
Want to give yourself a better chance? Check out our Practical Tips To Help Improve Your Credit Score.
What Are The Key Differences Between Creditworthiness and Mortgage Affordability Checks?
Both creditworthiness and mortgage affordability checks are crucial in your mortgage application process, but they focus on different aspects of your financial profile.
Creditworthiness is all about your ability to borrow, based on your credit rating and the data credit reference agencies like Experian hold on you. Before approving a mortgage, lenders will perform a full credit check, reviewing your debts and any potential issues on your credit file, often over the past six years. This helps them assess how risky it might be to lend to you.Â
To stay on top of your financial health, it’s a good idea to keep an eye on your credit status. Tools like Check My File provide a comprehensive overview of your credit report, helping you understand your creditworthiness.
Mortgage affordability, on the other hand, looks at your current financial situation. It assesses your income, expenses, dependents, and other financial commitments to determine if you can comfortably afford the mortgage payments. The Financial Conduct Authority (FCA)Â mandates that lenders carry out this thorough financial review before approving your mortgage, to protect you from financial strain.
Both checks work together to give lenders a complete picture of your ability to manage a mortgage.
What Should I Expect from an Affordability Check?
During an affordability check, lenders will assess how much you can realistically borrow based on your financial situation. Typically, the amount you’re offered can range from as little as three times your annual income up to around six times, depending on your circumstances and the lender’s criteria. For a more detailed understanding of how much you might be able to borrow, check out our article How Much Mortgage Can I Borrow?
How To Prepare For Your Mortgage Affordability Check
Getting ready for your mortgage affordability check is key to a smooth application process. The more organised you are with your documents and information, the better your chances of approval. While specific requirements vary depending on your employment status, here are some common documents you should prepare if you’re employed:
Document List if You Are Employed
3 recent payslips and P60 for the past year
Bank statements showing your transactions
Proof of ID, such as your driving licence or passport
Proof of your address, typically utility bill
Document List If You Are Self-employed
If you are self-employed or run your own limited company, you’ll need to provide some additional documentation alongside your bank statements and ID. Here’s what you should prepare:
Tax calculations and tax year-overview reports for the past two or three years
Company accounts for the last two or three years
Generally, lenders prefer applicants with at least two years of self-employment history, but some may consider supporting applications after just 12 months if your business is solid and stable.
Since mortgage affordability checks for self-employed applicants can be more complex, it’s a good idea to consult a mortgage broker early in the process. Working closely with an accountant to gather and organise all necessary documents can also make the process smoother and support your application.
What About My Variable Income?
If you earn extra income through bonuses, overtime, or commissions, you may be able to include this in your income for affordability checks. While not all lenders will consider this additional income, most will if it can be verified. Demonstrating that you have received this variable income over the past three months can strengthen your case.
If you have a more complex income situation, working with a broker can help you make the right decisions and provide the right information for assessment.
Mortgage Affordability Check, What is the Process?
While online mortgage affordability calculators are widely accessible, ensuring accuracy in this crucial initial stage of the home-buying process, which connects to your Agreement in Principle, is imperative. To avoid potential issues later, you should consider the following approach:
Provide comprehensive documentation and details of your income and expenditure.
Your lender or broker will use this information to determine your mortgage limit.
Proceed to secure a mortgage Agreement in Principle.
Your chosen lender will conduct an internal credit check and, if you pass, issue a mortgage decision certificate.
What Happens If I Fail A Credit Check?
Failing a credit check doesn’t mean you won’t qualify for a mortgage in the future, but it may indicate you need to change your financial situation before you apply again. Using a broker will help you quickly establish if there are alternative lender options.
If you haven’t passed a credit assessment, some of the measures you could use to improve your chances next time include:
Paying off any existing debt
Cancelling any credit cards which are no longer in use
Ensuring your bills are paid on time
Registering to vote
Improving your credit score on your credit report
Getting into the habit of budgeting
In conclusion, understanding mortgage affordability and credit checks is crucial for you as a prospective homebuyer. Affordability checks ensure you can manage your mortgage payments based on your financial situation, including income, expenses, and debts. Credit checks provide lenders with a clear view of your creditworthiness and repayment history. By preparing for these assessments, you can improve your chances of securing a suitable mortgage, leading to a smoother and more confident home buying experience.
For further information and a wealth of additional resources, we invite you to visit our Learning Centre. Here, you will find many more helpful articles, including:
By exploring these articles, you will be well-equipped with the knowledge needed to navigate the home-buying process confidently and effectively.
Your home may be repossessed if you do not keep up repayments on your mortgage.
You may have to pay an early repayment charge to your existing lender if you remortgage.
Published by Beechwood Mortgages Ref: 219335 with review and approval from Stonebridge Mortgage Solutions Limited who is authorised and regulated by the Financial Conduct Authority Ref: 454811.