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What is an affordability assessment?

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    An affordability assessment is a calculation to work out whether a potential borrower can afford the monthly repayments on their chosen mortgage product.

    All borrowers are subject to affordability assessments, but the exact methods for calculating affordability will vary from lender to lender.

    What happens during an affordability assessment?

    Affordability checks are undertaken by most lenders to establish customer affordability as part of the mortgage application process.

    You’ll be asked to supply information on your monthly income and outgoings as part of your mortgage provider’s commitment to responsible lending.

    Why are affordability assessments used during mortgage applications?

    Affordability assessments for mortgages and other credit applications are required by the Financial Conduct Authority to prevent irresponsible lending.

    The mortgage affordability check ensures borrowers don’t run into financial trouble leading to large debts that can’t be paid back and house repossessions.

    What impacts your mortgage affordability?

    Your affordability assessment looks in detail at a range of financial information to determine if you can afford to borrow the amount of money you are requesting from the bank, building society or another mortgage provider.

    The lender will check your employment status, your previous credit profile and your current financial situation to determine if you can afford monthly repayments.

    Income

    You’ll need to provide proof of income for the month and any extra income you might receive such as overtime, bonus payments, state benefits such as child support or income from freelance work.

    Expenses

    Regular household expenses, such as council tax, utility bills, child maintenance payments, personal loans, car finance agreements, insurance policies, credit or store cards and payments for any other debts.

    Plus, your other essential living costs like groceries, travel, subscriptions and childcare costs and even school fees will be taken into account in your affordability check.

    Your lender will work out how much is left over when all your expenses are deducted from your regular income to assess if you can afford repayments. The lender may look at your bank statements to gauge a picture of your normal monthly expenditure.

    Credit History

    Your lender will also look at your credit file to check if you have any previous loan defaults or if you have a bad credit rating.

    A poor credit score may mean that you fail an affordability check and may have your application rejected.

    Learn how you can improve your credit score here.

    Debt to income ratio

    Lenders may also calculate your debt-to-income ratio. This looks at the relationship between your incomings and your existing regular monthly debts.

    Debts include student loans, personal or car loans and outstanding balances on credit cards. If your incomings total £2,500 per month and your debt repayments are £500, then the ratio would be 20%. A ratio of up to 20% would usually be considered low risk by many lenders.

    Above 60% is often classed as high risk, and although you may still be able to get a mortgage, you may find that interest rates and fees are higher.

    Financial dependencies

    Affordability checks will consider anyone who is financially dependent on you, even if they do not live with you. If you have non-resident children that you support, any regular payments you make for them must be included in the affordability check.

    Speak to our mortgage experts today to see how much you can borrow

    Thorough checks are vital to check a customer’s affordability so borrowers don’t get into financial difficulties, unable to make their loan repayments.

    If you aren’t sure whether your existing debts are likely to have an impact on your ability to afford repayments, get in touch with us at Simmonds Mortgage Services on 01184 693037 for a free no-obligation chat.

    FAQs about affordability assessments

    To learn more about affordability assessments, check out our frequently asked questions below or contact us today:

    What happens if I find myself in financial hardship?

    If you are unable to afford your mortgage payment, contact your lender as soon as possible. Your lender will work with you to find options so you can afford to repay at least some of your mortgage each month while giving you some breathing space to sort out your future finances.

    I’m self-employed – how does this impact an affordability assessment?

    If you are self-employed, you will usually need to provide your tax year overviews for the past three years as well as your audited accounts. Some lenders will lend on the basis of one year’s accounts to those newly in business, but there are fewer providers, so these mortgages are often more expensive.

    If I have bad credit, can I still pass an affordability assessment?

    Yes, but poor credit scores could make lenders perceive you as a higher risk which could impact the interest rate that is offered.

    What is the stress test?

    The requirement for a stress test on mortgage affordability which was introduced in 2014, has now been scrapped in the UK. This stress test is no longer mandatory for lenders to complete, although some lenders may still use this to check if the loan amount requested is more money than the borrower can afford if interest rates rise or financial circumstances change.

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    Andrew Simmonds

    Andrew Simmonds is the managing director at Simmonds Mortgage Services. He's been providing mortgage advice to home owners for many years.

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