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Declined on affordability

What you should do if your mortgage application is declined due to affordability.

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By Pete Mugleston   Mortgage Advisor

Last updated: 8th February 2019 *

Affordability assessments for mortgages have become much more stringent in the last few years and we receive lots of enquiries from people who have had their  application declined on the basis of affordability.

The great news is that all lenders use their own affordability criteria when assessing mortgage applications. So, if a lender has declined your application don’t despair; there could be other options available to you. Once you’ve read through the information below, it’s crucial you make an enquiry with us, so we can arrange for a specialist we work with to contact you directly.

In this article we’ll look at:

  • Why was my mortgage declined based on affordability?
  • What types of income will lenders take into account?
  • How does a lender assess my self-employed income for affordability purposes?
  • Will lenders consider other forms of income for affordability purposes?
  • What other factors would affect affordability?
  • What other reasons would a lender decline a mortgage application?
  • Can I still have a mortgage if I’ve been declined due to a poor credit history?
  • Speak to a mortgage affordability expert

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Why was my mortgage declined based on affordability?

To be completely candid, if your mortgage application failed due to affordability then the lender simply did not feel, based on the information provided and assessed against it’s criteria, you could afford to meet your repayments throughout the term.

There’s a whole host of reasons why they may have reached this conclusion, such as:

  • Income not high enough
  • Insufficient disposable income each month
  • Too many other debt commitments at present
  • Lender not willing to accept total income (bonus, commission etc)
  • Income multiple calculator insufficient for borrowing requirement
  • Poor credit rating
  • Not enough deposit

A number of these reasons could well be quite valid. The lender is completely entitled to decline an application rather than take what they consider too bigger risk that may, potentially, create serious consequences both for the lender and the borrower down the line.

Following the Mortgage Market Review (MMR), completed in 2014 by the Financial Conduct Authority (FCA), all UK lenders must now take much greater responsibility for the lending they approve. They do this by analysing, in great depth, an applicant’s ability to meet their repayments.

How do lenders assess affordability?

Prior to the MMR, lenders would use a simple income multiple calculation to use as a basis for establishing affordability. So, for example an applicant with a salary of £40,000 applying for a mortgage with a lender who uses a 4x income multiple would be able to borrow a maximum of £160,000 from that lender.

Standard income multiple criteria will only really tell part of the story. Since the MMR, borrowers are able to use much more in-depth mortgage affordability calculators to calculate how much they can borrow, based on their current and future outgoings.

What income multiples will lenders use to work out how much I can borrow?

Income multiples are still a key ‘rule of thumb’ used by lenders when determining what an applicant is able to borrow. Most lenders will use an income multiple of 4x salary, some will use 5x salary and a minority will stretch to 6x salary.

Following MMR’s introduction all UK lenders now have their own, bespoke, assessment criteria. So, as mentioned, it may be you’ve been declined because the lender didn’t take all of your income into account or used a lower income multiple than may be used by others.

Using the example above, if that person had approached a lender who used a 5x income multiple rather than 4x they could have borrowed up to £200,000 which is a fairly big leap.

Also, what if the person’s basic salary was £40,000 but they earned a further £20,000 in bonuses? Did that lender take this into account when assessing the application?

All these different aspects of someone’s income and how they can be assessed (which we’ll explore in more detail in the next sections) can be quite difficult to grasp. That’s why it’s vital you get in touch with us so we can arrange for an advisor we work with to speak with you direct.

What types of income will lenders take into account?

As previously mentioned, lots of the enquiries we receive are from people who have been turned down for a mortgage based on affordability. In  many of these cases, the applicant’s income was derived from a number of different sources but not all were taken into account during the lender’s affordability assessment process.

So, how are different types of income usually assessed for affordability purposes?

How is my basic salary assessed?

With a basic salary you’re on the safest ground as this is considered guaranteed income. For employed applicants who derive their income from a basic salary, lenders will take 100% of this income source into account when assessing affordability.

Lots of people in full-time employment can potentially be entitled to other types of income in addition to their basic salary such as regular bonuses, overtime, sales commission, car/housing allowances and mortgage subsidies. How do lenders view these additional types of income?

Can I include my regular bonuses and overtime for affordability assessment?

Yes, some lenders will accept this, but  not all will necessarily accept the total amount of these additions to earned income. Most will accept 50%, some who will accept 60% and a few will accept 100% upon receipt of documentary evidence (such as a P60) or a letter from your employer.

Can I include my commissions for affordability assessment?

Yes, with some providers, you can include any regular commissions you earn in addition to your basic salary as part of your mortgage application. As with bonuses and overtime not all lenders will accept the total amount earned from this type of income. Most will accept 50%, some will accept up to 75% and a few will consider up to 100% with documentary evidence and sufficient track record of regular payments.

What if I receive allowances as part of my salary package such as for a car, a house or my location?

Most lenders will accept 100% of any additional guaranteed allowance such as for a car, house or for location purposes. Typically a lender will require documentary evidence in the form of an employment contract stating the type of allowance and amount. In the case of a housing allowance, some lenders may want to see that the allowance is permanent rather than for a specific period (say, 2 years).

As you can see, there are lots of different permutations for additional income types and how different lenders will view them. If you get in touch with us we can introduce you to a specialist who can discuss your specific personal circumstances and introduce you to the lender best positioned to offer you a favourable deal.

How does a lender assess my self-employed income for affordability purposes?

The key difference between self-employed and employed is the reliability (or regularity) of your income stream. In this respect, self-employed applicants will typically need to show evidence of a solid trading record over a period of time.

If you’re a sole trader, for example, lenders will typically look at income as net profit drawn from the business over an average of, say, the last 3 years. If you’re a director of your own limited company most lenders will take account of both salary drawn and any dividends paid.

For self-employed contractors most lenders focus on what your daily rate is, multiply this by five days a week and then use a number of working weeks (say, 48 to account for any holidays) to assess your annual earnings.

Whatever your status, most lenders will want to see a trading track record of at least 3 years, some will accept 2 years, a few will accept only a 12 month track record and a handful can even consider less than 12 months in the right circumstances.

If you’re self-employed and wish to receive further advice in this area get in touch and we will ask an advisor we work with to speak with you. You can also read more about self-employed mortgages here.

Will lenders consider other forms of income for affordability purposes?

Yes, without a doubt. However, as with different types of earned income mentioned already in this article, not all lenders will treat these income sources the same for affordability purposes. These other forms of income could be:

  • Investment income
  • Rental income
  • Retirement income
  • Benefits income
  • Maintenance payments
  • Trust income
  • Any other legal revenue stream you have

How these income streams are considered depends upon the lenders affordability criteria. For example, most lenders will accept 100% of maintenance payments if paid through a court instruction and deemed reliable throughout the term. If not paid through the courts (say, based on a verbal agreement) some lenders will accept up to 75% of the amount.

Rather than trying to sift through what each lender will or won’t accept why not let us help? If you get in touch we can arrange for a specialist in this area to speak with you.

What other factors would affect an affordability assessment?

Most lenders take a number of other variables into account when calculating affordability, and they include...

Outgoings

When lenders conduct their affordability assessments they don’t just assess income levels. Taking responsibility for their lending means a lender also has to take a close look at an applicant’s outgoings.

General expenditure such as food and grocery costs, utility bills and any other outstanding debts, namely, credit card and loan payments will be reviewed to assess an applicants disposable income position. Some lenders may be prepared to ignore any loan or credit card payments if an applicant confirms they will be cleared before the commencement of their mortgage.

Other outgoings that some lenders may be prepared to ignore when conducting an affordability assessment include:

  • Company pension contributions
  • School fees
  • Sharesave schemes
  • Charitable donations
  • Private healthcare
  • Travel season ticket loans

Future changes in expenditure

A lender will also want to ‘stress-test’ your finances to be assured you will be able to meet your mortgage commitments in the event of an unexpected change in your circumstances such as a sustained increase in interest rates or if you were ever unable to work due to an illness.

Such stringent affordability assessments are performed to provide confidence both for the lender and yourselves that you don’t run the risk of falling behind with your mortgage payments. If a lender isn’t satisfied your mortgage application could be declined.

It cannot be stressed enough that all lenders use their own criteria for affordability assessments; therefore, you really need to speak to a specialist who understands all the different nuances. Make an enquiry and we’ll have one of the advisers we work with give you the right advice.

What other reasons would a lender decline an application?

Affordability would likely be one of, if not, the biggest reason why a lender would decline a mortgage application. However, there are quite a few other scenarios that a lender may deem too risky to accept.

Deposit levels

Generally, the lower the deposit the more risky a mortgage application will look. This means fewer lenders giving it due consideration. Those who do may apply higher interest rates to negate this risk. Most lenders will accept deposits of 20%, some will accept 10% and a select few will accept as little as 5% for a residential property. Minimum deposit requirements are typically higher for buy to let mortgages, with 15% being the lowest you’re likely to find.

Unique properties

Seeking a mortgage for a unique property, by definition, will typically result in a finite number of lenders who are prepared to consider the application. Fewer lenders mean more chance of a mortgage being declined. You can read more about non-standard construction mortgages here.

Age

Mature applicants looking for a mortgage may find that the terms offered can make a property purchase unfeasible as the term may be too short resulting in payments becoming unaffordable.

However most lenders will consider applications with a maximum age of 75 at the end of the term, some have a maximum age of 85 and a few have no maximum at all, and will lend to a pensioner of any age as long as they are confident the mortgage payments will be met each month.

Applicants over the age of 55 can also consider the option of equity release on an existing property as an alternative. If you’re approaching retirement and wish to speak with someone about a mortgage we can arrange for a specialist to talk with you.

Large loan request

Larger borrowing requirements still follow the same general guidelines as all other lending. However, there may be fewer lenders willing to consider these applications resulting in a higher chance of the mortgage being declined.

Can I still have a mortgage if I’ve been declined due to a poor credit history?

A poor credit history can, no doubt, cause problems with a mortgage application depending on the type of issue you’ve had and when it was registered.

The good news is there are some lenders who will look at applications from borrowers who have had credit issues in the past and a few who specialise in these types of applications.

Certain specialist lenders will consider mortgage applications from borrowers with the following against their name...

  • late payments
  • defaults
  • CCJs
  • mortgage arrears
  • debt management plans
  • IVAs
  • bankruptcy
  • repossession

You can read more about bad credit mortgages here or make an enquiry to discuss them with an expert broker over the phone.

Speak to a mortgage affordability specialist

If you are ready to establish the right mortgage for you, have a question or you’d like to know more, call Online Mortgage Advisor today on 0800 304 7880 or make an enquiry here.

Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances.  – We don’t charge a fee and there’s absolutely no obligation or marks on your credit rating.

Updated: 8th February 2019
OnlineMortgageAdvisor 2019 ©

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.