Before applying for a mortgage, you need to think about more than just whether you can afford the monthly repayments. We will look at your income and outgoings to see if you can keep up with repayments if interest rates rise or your circumstances change.
Debt-to-Income Ratio
We base their decisions on what’s known as the loan-to-income ratio – the amount you want to borrow divided by how much you earn. The most you can borrow is usually capped at four-and-a-half times your annual income, with most lenders but we have a more accommodative multiple (allowed via term extension) to five to eight times your annual net income subject to mandatory assessment.
If we think you won’t be able to afford your mortgage payments in these circumstances, we might limit how much you can borrow.
Lending Determinants / Factors
When working out how much you can afford to borrow, we will look at:
1. Your Income.
This will include -
• Your basic income
• Income from your pension or investments
• Income in the form of child maintenance and financial support from ex-spouses
• Any other earnings you have – for example, from overtime, commission or bonus payments or a second job or freelance work.
You will need to provide pay slips and bank statements as evidence of your income.
If you’re self-employed you’ll need to provide:
• Bank statements
• Business accounts
• Details of the income tax you’ve paid.
You will normally have to provide two- or three-years’ worth of tax returns and business accounts.
2. Your outgoings
This might include:
• credit card repayments
• maintenance payments
• insurance - building, contents, travel, pet, life, etc
• any other loans or credit agreements you might have
• bills such as water, gas, electricity, phone, broadband
We might ask for estimates of your living costs such as spending on clothes, basic recreation and childcare. We might also ask to see some recent bank statements to back up the figures you supply.
3. Impactful Future Changes
We will assess whether you’d be able to pay your mortgage if:
• interest rates increased
• you or your partner lost their job
• you couldn’t work because of illness
• your life changed, such as having a baby or a career break.
It’s important that you also think ahead and plan how you’d meet your payments. For example, you can help to protect yourself against unexpected drops in income by building up savings when you can or creating multiple income streams. Try to make sure it contains enough for three months’ outgoings, including your mortgage payments.
Related Pages