Affordability Assessments
When you’re looking to buy a home or refinance your mortgage, one of the first steps you’ll encounter is the affordability assessment.
This crucial process helps lenders determine whether you can afford the monthly repayments on your chosen mortgage product.
Understanding how an affordability assessment works can not only prepare you for what to expect but also increase your chances of securing a mortgage.
At Kerr & Watson, we specialise in providing expert mortgage and protection advice to help you navigate this essential step with confidence.
What Happens During an Affordability Assessment?
An affordability assessment is a thorough evaluation conducted by lenders to establish your financial capability to repay a mortgage. Here’s what typically happens during the assessment:
- Income Verification: You’ll need to provide proof of your income, including payslips, bank statements, self-employed profits, and any additional income sources such as bonuses or benefits.
- Expense Analysis: Lenders will scrutinise your regular expenses, including bills, loan repayments, childcare costs, and other essential living expenses.
- Credit Check: Your credit history will be reviewed to assess your past financial behaviour and current credit score.
- Debt-to-Income Ratio: This ratio compares your monthly debt payments to your monthly gross income, helping lenders gauge your financial health.
Why Are Affordability Assessments Important?
Affordability assessments are essential for both lenders and borrowers. They ensure that:
- Responsible Lending: Lenders comply with regulations and avoid granting loans that borrowers cannot repay, which helps prevent financial hardship and potential defaults.
- Financial Stability: Borrowers can comfortably manage their mortgage repayments without jeopardising their financial wellbeing.
- Risk Management: By evaluating a borrower’s financial status, lenders can mitigate the risk of lending.
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Key Factors Impacting Mortgage Affordability
Several factors influence the outcome of an affordability assessment. Understanding these can help you better prepare for the process:
Income
Lenders will examine all sources of your income to determine your borrowing capacity. This includes:
- Salary: Your regular earnings from employment.
- Self-Employed Income: Lender’s will look at what your net profits were as a sole trader or a partnership and look at the financial performance of your limited company.
- Bonuses and Overtime: Additional earnings from your job.
- Benefits: State benefits such as child support or income from freelance work.
Expenses
Your monthly outgoings are crucial in assessing your affordability. These typically include:
- Household Bills: Council tax, utilities, insurance policies.
- Debts: Personal loans, car finance agreements, credit or store card payments.
- Living Costs: Groceries, travel, subscriptions, childcare, maintenance payments and school fees.
Lenders will subtract these expenses from your income to determine how much you have left to cover mortgage repayments.
Credit History
Your credit file provides a snapshot of your financial behaviour. Lenders look for:
- Payment History: Timeliness of past debt repayments.
- Defaults: Any missed payments or loan defaults.
- Credit Score: A numerical representation of your creditworthiness.
To check your credit file, go to CheckMyFile.
Debt-to-Income Ratio
This ratio compares your monthly debt payments to your monthly gross income. A lower ratio indicates better financial health and higher borrowing capacity.
- Low Risk: A ratio below 20% is generally considered low risk.
- High Risk: A ratio above 60% may be seen as high risk, potentially leading to higher interest rates or fees.
Lender’s all have their own ideas around what is high risk to them, including debt to income thresholds so best to speak with a qualified adviser to understand your position.
Preparing for an Affordability Assessment
To improve your chances of passing an affordability assessment, consider the following tips:
- Organise Documentation: Gather payslips, bank statements, and evidence of any additional income or benefits.
- Reduce Debt: Consider paying off existing debts if you can to lower your debt-to-income ratio.
- Improve Credit Score: Ensure timely bill payments, reduce outstanding credit card balances, and correct any errors on your credit report.
Conclusion
An affordability assessment is a critical step in securing a mortgage. By understanding the process and preparing adequately, you can enhance your chances of approval and find a mortgage that suits your needs.
At Kerr & Watson, our mission is to make this journey as smooth and stress-free as possible.
Contact us today to learn more about how we can assist you with your mortgage and protection needs.
