When you apply for a mortgage, lenders assess your eligibility against their own criteria. They are looking to assess the level of risk you represent to them, in terms of your ability to make mortgage payments on time. This is known as mortgage affordability. Each lender will have their own factors they look at, but may include your income, outgoings, employment security, loan-to-value ratio and debt-to-income ratio. In this article, we’ll discuss each of these factors as well as how you can improve your affordability status.
Income
Lenders will consider your general, regular income. This will include not just income from your employment, but also from your pension or investments. If you receive bonuses or commission at work this will be included, and child maintenance support you receive is factored in too. This is a key factor, as regular income could provide funds for making mortgage payments.
Outgoings
The antithesis of income, your expenses also provide a key factor for lenders. Your expenses may include credit card payments, insurances, car loans and other regular outgoings such as such as council tax. Other outgoings may include regular spending habits such as food shopping, childcare costs, subscriptions, and even regular takeaways.
Your outgoings are as important a factor to lenders as your income. If you have significant income but also significant outgoings, this may be a risk factor for lenders. This is because less income may be left to cover the cost of mortgage payments.
Debt-to-income ratio
Debt-to-income (DTI) is an assessment of your financial stability. It takes into account both your income and outgoing, so they are not being viewed in isolation. If you have a low debt-to-income ratio, this signifies that you have more disposable income available. The DTI ratio is expressed as a percentage. It is calculated by dividing your total monthly outgoings by your gross monthly income. Lenders are looking to mitigate the risk of borrowers defaulting on mortgage payments. A lower DTI signifies a lower risk of defaulting, with a higher DTI showing you are more vulnerable to financial turbulence.
Your DTI ratio can not just influence whether you’ll be offered mortgage terms, but the detail of the mortgage too. The lower your DTI ratio, the lower the interest rates you are offered may be. Lenders will often have a threshold of DTI scores, for loan eligibility. You must meet this threshold in order to qualify for a loan offer. As an indication, a DTI ratio of 43% or lower is often considered favourable. However requirements and eligibility criteria differ between lenders.
Understanding how the DTI ratio affects mortgages is essential if you are looking to secure finance to buy a property. Find out more about this in our earlier blog post.
Employment security
This factor relates to how long you have been in your current role for and the type of contract you have. It is important for mortgage lenders to ensure you are able to afford mortgage payments not just now, but in the future too. Permanent contracts signify greater employment stability than a temporary contract, for example.
Loan-to-value ratio
Your loan-to-value ratio is the amount you are looking to borrow relative to the value of the property.
Example
If you’re looking to purchase a property worth £250,000 and have a deposit of £25,000, you need to borrow £225,000.
Loan amount divided by property value = £225,000 / £250,000 = 0.9 = 90%
Your loan-to-value ratio is 90%.
The lower the percentage, the lower the risk you pose to lenders. You can put yourself in a better loan-to-value ratio position with a higher deposit value. This will bring down the mortgage loan required to secure your property. The lower your risk level, the more favourable the mortgage terms available to you typically, including lower interest rates.
Credit score
Your credit score is a representation of your credit worthiness. It is a number calculated by a credit reference agency such as Experian* and represents the level of risk you represent to lenders. It can indicate the likelihood you’ll be able to meet your mortgage repayment obligations. This is because the score is calculated by looking at how you have repaid credit in the past.
Should you not have a credit score yet, or wish to improve your low score, there are steps you can take. Ensuring you are on the electoral register helps confirm your identity and address. You can also pay off outstanding debts such as car loans and credit cards, and ensure you correct any mistakes that appear on your credit record. Find out more about getting a mortgage with a poor or no credit score in our recent blog post.
How to improve your mortgage affordability
There are a number of ways in which you may improve your mortgage affordability, including:
- Reducing the size of the loan you require. This can be achieved by increasing your deposit size or finding a lower value property. The result will be a lower loan-to-value ratio.
- Exhibiting positive cash management skills will also be advantageous to you. You can reduce unnecessary outgoings, freeing up disposable income.
- Seek secure employment where possible, to show potential lenders you will be able to make mortgage payments in the longer-term
How can Bell Mortgage Solutions help you?
You’ll not know for sure about the terms you’ll receive for potential mortgages until you officially apply. However the team at Bell Mortgage Solutions can discuss mortgage affordability factors in relation to your individual financial circumstances. Our experts can offer advice on optimising your DTI ratio to demonstrate financial responsibility if required. We’ll help you navigate the market and identify suitable lenders with whom you’re likely to meet eligibility criteria.
Contact us now to make an appointment.
Please note: Your home may be repossessed if you do not keep up repayments on your mortgage.
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The information contained within was correct at the time of publication but is subject to change.
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