How the New mortgage lending rules will affect your application.

Mortgage Affordability Checks

Applying for a mortgage involves more than proving your income and passing a credit check. A lender must assess whether the mortgage is affordable both when it begins and, where required, if borrowing costs rise in the future. These checks are intended to reduce irresponsible lending and the risk of borrowers taking on commitments they cannot reasonably afford.

What Is a Mortgage Affordability Assessment?

A mortgage affordability assessment compares your verified income with your regular expenditure and financial commitments. The lender will usually consider:

• Salary, bonuses, overtime and commission;
• Self-employed or business income;
• Pension, benefit or rental income where acceptable;
• Loans, credit cards and car finance;
• Childcare and maintenance payments;
• Household bills and essential living costs;
• The proposed mortgage payment;
• The mortgage term and your age;
• The size of the deposit; and
• Whether payments would remain manageable if circumstances changed.

Each lender has its own criteria. Being accepted by one lender does not guarantee that another will offer the same amount.

Mortgage Stress Testing

A stress test considers whether the borrower could continue to afford the mortgage if interest rates or payments increased. There is no universal rule requiring every applicant to be tested at a rate of 7%. Where the initial mortgage rate is not fixed for at least five years, lenders must generally consider the effect of likely interest rate increases over a minimum five-year period. They have the flexibility to design a test appropriate to the mortgage and the rate the borrower is likely to pay in future. A separate stress test is not normally required where the interest rate is fixed for at least the first five years, although the lender must still decide that the mortgage is affordable.

What Spending Will a Lender Examine?

Mortgage lenders are interested primarily in committed and essential expenditure rather than in judging every personal purchasing decision. They may examine:

• Existing credit repayments;
• Rent or mortgage payments;
• Utility and council tax costs;
• Insurance;
• Travel and commuting expenses;
• Childcare, school fees and maintenance;
• Subscriptions and regular commitments; and
• Any other significant or recurring expenditure.

Lenders may use bank statements, credit-reference information, statistical living-cost data and details supplied in the application. Occasional spending on meals, holidays or entertainment will not necessarily prevent an application. However, persistent overdraft use, unpaid bills, gambling transactions or spending that leaves little available income may raise concerns. Do not conceal expenditure or provide inaccurate information. Mortgage fraud can have serious consequences.

Income Multiples

Mortgage affordability is not calculated using income alone, but loan-to-income ratios remain important. Some lenders may offer around four to four-and-a-half times household income, while others may lend more or less depending on:

• The applicant's occupation and income;
• The amount of the deposit;
• Credit history;
• Existing debts;
• The mortgage term;
• The property;
• Future income prospects; and
• The lender's own lending limits.

Regulatory measures also restrict the overall proportion of mortgage lending at high loan-to-income ratios. This does not create an individual right to borrow a particular multiple.

Interest-Only Mortgages

With an interest-only mortgage, the monthly payments normally cover only the interest. The original capital must still be repaid at the end of the term. A lender should not rely solely on the expectation that property prices will rise. The applicant will usually need a credible repayment strategy, such as:

• Investments;
• A pension lump sum where appropriate;
• An endowment policy;
• Sale of another property;
• Regular capital repayments; or
• Sale of the mortgaged property where the lender accepts this.

The lender may review the repayment plan during the mortgage term. Borrowers should also check it regularly, as a shortfall could require the property to be sold. Interest-only lending remains available, but eligibility is generally more restricted than for a repayment mortgage.

Self-Employed and Irregular Income

Self-employed applicants and people with variable earnings can obtain mortgages, but they may need to provide more evidence. A lender may request:

• Tax calculations and tax-year overviews;
• Business accounts;
• Bank statements;
• Contracts or evidence of continuing work;
• Details of salary and dividends; and
• An accountant's certificate.

The lender may average income over several years or use the most recent figure where there is a clear and sustainable trend. Bonus, overtime, commission and freelance income may be included in full, in part or not at all, depending on their regularity and the lender's policy.

Mortgage in Principle

A mortgage in principle, sometimes called an agreement or decision in principle, gives an initial indication of how much a lender may be willing to lend. It can help establish a realistic property budget and may reassure an estate agent that you have considered your finances. However, it is not a guaranteed mortgage offer. The lender will still need to:

• Complete a full affordability assessment;
• Check supporting documents;
• Assess your credit history;
• Value and approve the property; and
• Confirm that all lending conditions are satisfied.

Check whether obtaining a mortgage in principle will involve a soft or hard credit search, particularly when approaching several lenders.

Preparing for a Mortgage Application

Before applying:

• Review your credit reports and correct any errors;
• Register to vote at your current address where eligible;
• Reduce unnecessary unsecured debt;
• Avoid missed or late payments;
• Keep within agreed overdraft limits;
• Prepare evidence of income and deposit funds;
• Review regular subscriptions and commitments;
• Avoid taking out substantial new credit; and
• Calculate whether payments would remain manageable at a higher rate.

Do not make artificial changes merely to create a misleading impression for a lender. The aim should be to improve your genuine financial position and demonstrate sustainable affordability.

Documents You May Need

Depending on your circumstances, a lender or mortgage adviser may ask for:

• Proof of identity and address;
• Recent payslips;
• Bank statements;
• P60s;
• Tax returns or HMRC tax calculations;
• Business accounts;
• Evidence of benefits, pensions or other income;
• Proof of the deposit and its source;
• Details of loans and credit commitments; and
• Evidence of immigration or residency status where relevant.

Large or unexplained transfers may result in further questions. Your solicitor must also carry out anti-money-laundering checks on the deposit and purchase funds.

Gifted Deposits

Where a relative or another person is providing some or all of the deposit, the lender and conveyancer must be told. They will usually require confirmation:

• Who is providing the money;
• Where the funds came from;
• Whether it is a gift or a loan;
• Whether repayment is expected;
• Whether the donor will have an interest in the property; and
• Whether the donor intends to live there.

A supposed gift that must later be repaid is a financial commitment and may affect affordability.

Mortgage Fees and Overall Cost

The lowest interest rate is not always the cheapest mortgage. Compare:

• The interest rate;
• Product or arrangement fees;
• Valuation costs;
• Broker fees;
• Cashback or incentives;
• Early repayment charges;
• The rate after the initial deal ends; and
• The total cost over the period you expect to keep the mortgage.

A large product fee can make a low-rate mortgage less competitive, particularly on a smaller loan. Be cautious about paying a substantial non-refundable fee before understanding whether you are likely to meet the lender's criteria.

Should You Use a Mortgage Adviser?

A regulated mortgage adviser can assess your circumstances, explain the available mortgage types and identify lenders whose criteria may be suitable. Ask whether the adviser:

• Considers mortgages from across the market;
• Is restricted to particular lenders;
• Charges a fee;
• Receives commission; and
• Advises on specialist cases such as self-employment, adverse credit or later-life borrowing.

A bank or building society adviser will generally recommend only that lender's own products.

If Your Application Is Refused

A refusal does not necessarily mean that no lender will offer a mortgage. Possible reasons include:

• Insufficient income or available monthly surplus;
• Too much existing debt;
• Credit-history problems;
• Unacceptable income evidence;
• The loan-to-value or income multiple;
• The type or condition of the property;
• A short employment or trading history; or
• Failure to satisfy the lender's internal policy.

Avoid immediately making numerous further applications, as repeated hard credit searches may cause additional difficulty. Obtain the reason where possible and discuss the next step with a regulated adviser.

Affordability Is Also the Borrower's Responsibility

A lender's approval does not mean that the maximum available mortgage will be comfortable for your household. Consider how you would cope with:

• A rise in mortgage rates;
• Loss of employment or reduced earnings;
• Parental leave;
• Illness;
• Major repairs;
• Higher service charges; or
• Other unexpected expenditure.

Keeping an emergency fund and borrowing below the maximum offered can provide useful protection.

How Affordability Rules Affect the Property Market

Mortgage rules can restrict how much some buyers can borrow, particularly where property prices have risen faster than incomes. However, lending criteria are only one influence on the housing market. Prices and transactions are also affected by:

• Interest rates;
• Housing supply;
• Employment and wage growth;
• Taxation;
• Rental costs;
• Consumer confidence; and
• The availability of low-deposit mortgages.

Responsible lending rules are designed to reduce the risk of unaffordable household debt rather than control house prices directly.

Obtaining Legal Advice

A mortgage adviser deals with the financial product and borrowing recommendations. A conveyancing solicitor deals with the legal aspects of the property and the lender's security. Your solicitor will investigate the title, carry out searches, report on the mortgage conditions and arrange completion and registration. To find a Conveyancing Solicitor, use the search facility at the top of this page. We recommend contacting several firms to compare their experience, service and fees.