Mortgages – Understanding Affordability
Navigating the Path to Homeownership with Financial Stability.
The affordability part of the mortgage is about understanding what your mortgage means to you and the lender. Once your mortgage application succeeds you are agreeing to a long-term commitment, so you and your lender need to know you have enough money coming in to cover the payments. That is where the affordability comes in.
What Do We Mean By Affordability?
Let’s start with a little reminder of why you are applying for that mortgage so we can put affordability in context.
For most people, and perhaps first-time buyers in particular, you are borrowing the money to buy your permanent home. It will be your refuge from the world where you can relax and do whatever it is that makes you happy.
In many ways then, your mortgage is tied to an emotional decision to make a home for yourself. It is about more than money. For other applicants, it is a business transaction, and they want an easy-to-manage return for their money.
Whatever the reason though, the ideal situation is that your mortgage goes through, you then pay the monthly cost and you and the lender never need to worry about it again.
The affordability check is there to look at whether the mortgage payments are within your budget. It is a way to assess whether the mortgage you want is right for you financially.
How You Should Look At The Affordability Requirement?
Sometimes, during the application process, it turns out that the applicant has not quite hit the mark with what they tell us about affordability. Usually, this is because they are trying to give the mortgage companies what they want to hear. This is not a good idea. The affordability check is not there to be passed like a driving test, it is there to protect you and guide you to the right product and life choice. We don’t want you to have the wrong mortgage and you certainly don’t want to have a long-term commitment to something unsuitable. So, we suggest you treat the affordability check in much the same way the lenders do. Let it tell you what you can afford. Be honest and thorough so that we are all working on the right facts and figures.
For the applicant, an affordability check should be about knowing that you are making the right decisions. It means that you can apply with confidence and the certainty that you are comfortable with the repayments and your general financial well-being for years to come.
Affordability is a cornerstone of the mortgage application process, and it also plays a critical role in the success of your application. Just as importantly though, it’s designed to ensure that taking on a particular mortgage is in your best interest. So yes, it is about protecting both you and the lender from the risk, but it also means that you will also take possession of your new property with peace of mind that you made the right decision. That sounds like a great way to be on the first day in your new home, doesn’t it?
Affordability From The Lender’s Perspective
Lenders will want to look into your finances to gauge the viability of granting you a mortgage.
It’s really about risk management for them because, as responsible lenders, they need to understand the risk they are taking when they lend you the money. Your income, outgoings, and financial history create a picture of your financial health.
When you think about the amount of money they are going to make available to you, it is hardly surprising they want to know you can pay it back. For the lender, it’s about ensuring that the investment they make in you is sound. It’s assurance that you can uphold your end of the bargain without faltering.
As well as the focus on the repayment though, lenders also genuinely don’t want you to overreach or get into problems in the future. Most mortgage lenders have their own ethical standards to meet and genuinely want you to do the right thing for you.
What The Lenders Need to Know
It may seem like getting a mortgage could be a simple enough question of ‘how much do you earn, and how much is the mortgage repayment?’ but it is a little more complex. That question about income is only one factor (but still a very important one) in deciding what mortgage is right for you. It is also a requirement of the Financial Conduct Authority that lenders act responsibly and don’t lend more than the customer can afford to repay. Lenders will want to know more. Specifically, they will want to know about your current commitments and debts, and they will want to see you have been able to meet your monthly bills for a period of time. Your general living expenses will be a factor and of course, your credit history will matter. All these are then used to ‘stress test’ your finances. Various indicators, including what is known as the debt-to-income ratio (DTI), are then produced.
The DTI and other factors are then considered against what you can reasonably be expected to dedicate to mortgage repayments.Ultimately the question being answered is one about whether you can afford the mortgage. It’s about your whole financial picture. Your income is only a part of the story, so they want to understand your spending and what you have left when the bills are paid.
