Mortgage lenders must make sure you take out a mortgage that you can afford. Find out what they are likely to check along with the information you will have to provide. If you are applying for a new mortgage to buy a home, increasing your current mortgage or remortgaging, your lender must check that you can afford your repayments now and in the future. To do this they will need information about your income and outgoings.
PROVING YOUR INCOME
You will need to provide evidence of your income to show how much you can afford to borrow. If you are employed this might mean showing your payslips. If you are self-employed or a contractor you might have to show your tax returns, accounts, business plan or projected earnings. If the income you will use to cover your mortgage payments comes from more than one job, you will usually need to show evidence for each job. For other types of income like shares, bonuses or a pension you may have to provide documents proving how much you receive.
You will have to let your lender know if you expect your income to go down or your outgoings to go up. The evidence you will need for each type of income will vary between lenders. What ever they need from you, they must be sure that your income will cover your mortgage as well as you regular basic spending and other commitments.
CONFIRMING YOUR SPENDING
Your adviser or lender will also need to know what you need to spend to keep up a basic standard of living. They can then work out how much of your income you can afford to spend on your mortgage. They will look at your spending in three categories.
This is what you regularly spend on the things that you cannot do without, such as: Food, household cleaning and laundry, gas, electricity and other heating costs, water bills, telephone, essential travel, council tax, buildings insurance, ground rent and service charges (for leasehold properties).
BASIC QUALITY OF LIVING COSTS
This is what you need to spend on occasional essentials, with some allowance for leisure costs including: clothes, household goods (furniture and appliances) and repair, personal goods such as toiletries, basic leisure costs, including non-essential transport, Tv license and childcare.
REPAYMENTS AND OTHER COMMITMENTS
This covers other payments you know you will have to make including debts you are paying off such as credit card bills, loans or hire purchase payments. The exact details you will be asked for will vary between lenders but you should expect to discuss regular spending in all of these areas.
INTEREST ONLY MORTAGES
If you want to apply for an interest only mortgage then the lender will also ask you to explain and show proof of your plan for repaying the full loan when the interest only period ends. The lender will check that your plan is still in place at least once during the interest only period.
CHECKING FUTURE AFFORDABILITY
Your mortgage lender will look at how interest rates are predicted to change over a minimum of the next five years, to see how they might affect your mortgage payments. If your payments are likely to go up they will check that you could still afford them if your outgoings and income stayed the same. It is possible that rates could go up by more than predicted. If this happens then your payments could be higher than predicted too.
PAYING YOUR MORTGAGE AFTER YOU RETIRE
If your mortgage is due to last until after you retire then your lender will check that you can afford your payments with the income you expect to have during retirement. The information they need will depend on the lender and the length of time it is taken out before you look to retire.
CHANGING AN EXISTING MORTAGE
If you already have a mortgage and want to remortgage, a lender may be able to arrange this without doing all of the affordability checks. The lender will still have to do the checks if you are:
- increasing the amount that you are borrowing and/or
- making a change that might affect what you can afford (for example extending a mortgage into your retirement, or removing someone from a mortgage contract).
For further information about mortgages, please contact the Top House team.