Updated: Nov 23
When you take out any loan or finance, you will typically go through an affordability assessment process. These checks provide lenders with insight into whether you can afford loan repayments, any outstanding loans you hold, and the likelihood of lending causing financial hardship. What is an affordability assessment in the context of mortgages? We cover all the details below.
What Is An Affordability Assessment?
An affordability assessment is a process where the lender will review your income and expenditure. This assessment aims to identify whether you can afford to pay back the money you borrow. In this case, making payments back on a mortgage.
A lender will consider your outgoings and incomings for your mortgage application and use a credit reference agency to access your credit history for a clear idea of how much of a risk you are. As you’ll need to make monthly payments on your mortgage for a specific length of time, lenders want to ensure you can afford those payments without financial hardship.
Any responsible lender will carry out an affordability assessment when you apply for a mortgage. The Financial Conduct Authority (FCA) introduced specific measures for mortgage affordability guidelines in the UK in 2014. This practice requires all lenders to conduct checks and gather information to analyse affordability before approving any mortgage or loan.
Creditworthiness And Affordability: What’s The Difference?
When figuring out what is an affordability assessment, it’s easy to confuse this with the process that lenders use to identify creditworthiness. While both insights are essential to lenders in deciding whether to approve you, each goes about this differently. Here are the key differences between the two:
What Is The Definition Of Creditworthiness?
Creditworthiness refers to your ability to take out a loan or mortgage based on your credit rating and data held with credit reference agencies. A lender will carry out a full credit check before approving you, including looking at any other debts or potential issues on your credit file, generally looking back over a six year period. This information can help a lender decide how risky it may be to approve you for a mortgage.
What Is The Definition Of Affordability?
Affordability checks look at what you can realistically afford for a mortgage to decide whether or not to accept you. While creditworthiness deals with the risk to the lender, affordability is just as much about protecting you from accessing loans or finance that may cause you financial hardship. Affordability looks at what you can afford based on your income, financial dependents and general outgoings.
What Are The Key Differences Between The Two?
Creditworthiness and affordability assessments are both used in the mortgage application process to identify if you are a suitable person for approval. A loan provider will use creditworthiness to look at your history with loans and credit agreements to determine whether you make reliable payments. This process includes checking that there are no missed payments or defaults.
How does this affect your mortgage application? If you have a poor credit rating, this can lead to not being approved based on the lender’s requirements. All lenders consider your credit history and score when offering mortgages, with a higher credit score improving your chances of acceptance. Although the majority of lenders rely on their credit scoring process there are some that will not.
Affordability closely examines your current income and expenditure and a few other key factors to see whether it is feasible for you to get a mortgage. Under the Financial Conduct Authority, a comprehensive examination of your finances is a requirement before a lender can agree to offer you a mortgage.
What Are Affordability Assessments Used For?
Affordability assessments are used for any finance or loan you can take out, including a mortgage. Since 2014, lenders have been required to use a specific analysis process to identify if each applicant has access to the money necessary to pay back their mortgage without risk to their financial situation.
When a lender completes an affordability check, they are using your information to determine whether or not to approve you for a mortgage. Most lenders already used well-designed affordability assessments before 2014, but recent FCA rules have made the practice even stricter for mortgage providers.
An affordability assessment and creditworthiness check typically occurs in the first stage of a mortgage application. Some lenders may even offer calculators or automated tools to check affordability immediately before applying for a mortgage, preventing the chance of an application being rejected.
Why Do Mortgage Lenders Use Affordability Assessment?
The FCA requires a thorough process for checking affordability for every single applicant. Every mortgage provider has a responsibility to complete all of the necessary checks by gathering detailed information about the financial circumstances of every applicant.
Mortgage lenders also use affordability assessments to lower risk. Alongside a credit report, an affordability check can provide information on whether or not a person can easily afford a mortgage.
What To Prepare For An Affordability Assessment
If you plan to apply for a mortgage, ensuring you have all the information and paperwork needed for an affordability assessment is an excellent first step. The exact documentation you’ll need will depend on your current employment. Here are some examples of what you should prepare before applying for a mortgage:
Affordability Assessment If You Are Employed
If you are employed, the process for your affordability assessment is relatively straightforward. You will generally need to supply the following documents:
Payslips & P60 for the most recent year
Identification, such as a driving licence or passport
Proof of your address, typically through utility bills
A potential mortgage lender uses this information to identify how much income you bring in each month and how much your outgoings are. A mortgage advisor can support you in ensuring you have all the correct information ready to go to ensure you don’t miss any details that can lead to rejection.
Affordability Assessment If You Are Self-employed
If you are self-employed or you run your own limited company, the process to complete your affordability assessment is slightly more complex. Unlike an employed person, you’ll need to provide additional details to confirm whether you are a good choice for a mortgage lender. The additional documentation you’ll need to submit includes:
Tax Calculations and Tax Year Overviews for the past two/three years
Last two/three years Company Accounts
Whilst being self employed for at least two years is preferable, certainly to access most lenders, some can consider supporting if you've only been in business for 12 months.
As affordability assessments for self-employed people require additional knowledge and expertise, speaking to a mortgage broker is often an excellent place to start. Working with an accountant to gather all necessary documentation can also help to support your assessment.
Affordability Assessment For Additional Income
If you earn extra income through bonuses, overtime, and commission, you may be able to include this as a part of your income for affordability checks. Not all lenders will consider this additional type of income but most will. 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.
What Is The Process Of An Affordability Assessment?
The process of an affordability assessment is relatively straightforward and typically looks like this:
You submit documentation and information that details your incomings and outgoings
The lender uses this information for their internal affordability assessment processes
You are informed on whether your affordability check was successful
If successful, a credit check is carried out, and the application continues to approval
Calculating your affordability risk ahead of time can help to give you a general idea of whether you will be approved.
What Happens If I Fail A Credit Assessment?
Failing a credit assessment 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
At Beechwood Mortgages, we have supported hundreds of clients in completing their affordability & credit assessment processes. Get in touch today to learn more about how we could help you.
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