When you apply for a mortgage, lenders have to make sure that you can afford your monthly repayments. Read on to learn everything you need to know about applying for a mortgage.
How do lenders check I can afford a mortgage?
Lenders will add up all your household income, including:
- Your basic salary
- Freelancing work
- Any benefits, commission or bonuses, and
- Any additional income you receive from a second job
Checking affordability is a much more detailed process.
Lenders take all your regular household bills and outgoings into account, along with any debts such as loans and credit cards.
To make sure you have enough left to cover the monthly mortgage repayments.
They also have to ‘stress test’ whether you could still afford the mortgage if:
- You were to retire
- Interest rates were to rise
- You were to go on maternity leave or end a fixed-term contract
In addition, they’ll run a credit report with a credit reference agency to take a look at your financial history and assess how much of a risk lending to you might be.
How to prepare for your application
Before applying for a mortgage, contact the three main credit reference agencies and order your credit reports.
Make sure there is no incorrect information about you.
You can do this online and it’s often free of charge for up to 30 days.
Start collecting all the documents you will need for the mortgage application. This includes:
- Utility bills
- Proof of benefits received
- P60 form from your employer
- Your last three months’ payslips
- Passport or driving license (to prove your identity)
- Bank statements of your current account for the last three to six month
- Statement of two to three years’ accounts from an accountant if self-employed
- Tax return form SA302 if you have earnings from more than one source or are self-employed
- Self-employed people should look to provide information alongside their tax return, which supports what the SA302 says about their income, such as bank statements
Be accurate. Make sure the information on the application form matches the documents you supply.
For example, don’t round up your salary if the amount on the payslips differ from this figure.
Provide details of the address of the property, the estate agent and your solicitor.
These are the basics – some lenders might ask for more paperwork.
Bear in mind that lenders might have different criteria around income and outgoings.
Ask your lender or independent mortgage adviser what else you might need.
Please note, printouts of online statements of your current account and utility bills might not be acceptable.
You will either need hard copies or to have copies certified by your solicitor, your bank or your utility provider.
How you spend your money
You might also need to show your outgoings, including how much you’re borrowing on credit cards and other loans.
As well as your household bills, including:
- Utility bills
- Council tax
- Insurance policies, and
- General living costs such as travel, childcare and entertainment
Are you remortgaging?
If you want to increase the size of your mortgage you might also have to go through the affordability checks above, and you’ll be given advice around which mortgage products are suitable.
If you have a mortgage and don’t want to borrow any additional money, there are more flexible arrangements.
Read more about it in our guide to Remortgaging.
Do you want an interest-only mortgage?
Not all lenders offer interest-only mortgages.
If you do apply for one, you will have to show that you have a credible repayment method in place, as well as meeting the necessary income criteria.
Read our guides below for more information:
Speak to a mortgage adviser
It’s wise to speak to a range of people so you can choose the right mortgage for you.
This could include lenders’ advisers or you can speak to an independent financial adviser (IFA) or mortgage broker.
Calculate the total cost of your mortgage
The lender or the broker will do this for you, but do make sure they fully explain all the charges and fees.
Including any conditional charges and fees too, such as early repayment penalties.
Some brokers will not charge fees for advice as they might receive a commission from the lender.
In-house bank and building society advisers are also unlikely to charge a fee for their advice.
Currently, you’re provided with an Annual Percentage Rate (APR), which shows the total yearly cost of a mortgage and is expressed as a percentage of the loan amount.
From March 2016, new rules require lenders to use one or more Annual Percentage Rate of Charge (APRC) calculations instead.
The APRC, although calculated in a very similar way, includes any fees such as valuation or redemption fees associated with your mortgage deal.
This will give you a more thorough comparison between mortgages deals that take into account these additional associated fees.
From March 2016, these fees and charges will be part of the calculation for the annual interest rate.
This rate, which is known as the Annual Percentage Rate of Charge (APRC) should enable you to compare the total cost of one mortgage with another.
Comparison websites are a good starting point for anyone trying to find a mortgage tailored to their needs.
We recommend the following websites for comparing mortgages:
- Comparison websites won’t all give you the same results, so make sure you use more than one site before making a decision.
- It is also important to do some research into the type of product and features you need before making a purchase or changing supplier.
- Find out more in our guide to comparison sitesopens in new window
Try our Affordability calculator to see how much you might be able to borrow.
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