As a premier whole-of-market mortgage broker based in Bournemouth, we offer expert mortgage advice to clients in Bournemouth, Poole, Christchurch, and beyond. Understanding how lenders assess affordability and calculate how much you can borrow is crucial when planning to purchase a property. This guide provides insights into the key factors lenders consider and the various income types they take into account.
How Lenders Assess Affordability
Lenders assess mortgage affordability to ensure you can comfortably meet your mortgage repayments. The assessment involves a detailed evaluation of your income, outgoings, and financial commitments.
Key Factors Considered:
- Income Assessment
- Outgoings and Existing Debt
- Credit History and Score
- Deposit Amount
- Interest Rate Stress Testing
Detailed Breakdown of Income Types Considered
Lenders consider various income sources to determine your borrowing capacity. Here’s how they evaluate different types of income:
Guaranteed Basic Salary
100% Usage: Lenders use 100% of your guaranteed basic salary in their affordability calculations. This is the most straightforward income type to assess.
Bonus, Commission, and Overtime
50-100% Usage: Lenders may use between 50% and 100% of your bonus, commission, and overtime earnings. The exact percentage depends on the consistency and reliability of these earnings over time.
Allowances
Shift and Car Allowances: Additional allowances such as shift allowances and car allowances are considered by lenders as part of your income. The full amount of these allowances can typically be used in affordability assessments.
Self-Employed Income
Net Profit: For self-employed individuals, lenders use the net profit figure from your business accounts. This figure reflects your business’s profitability and your personal earnings from the business.
Limited Company Directors
Salary and Dividends: If you are a limited company director with a 20% shareholding or more, lenders will assess your affordability using either:
A combination of salary and dividends, averaged over the last two years.
Salary and net profit of the business, averaged over the last two years.
In some cases a lender may use your latest years figures only
Pension Income
100% Usage: For those in receipt of pension income, lenders will use 100% of this income in their affordability calculations. This applies to both private and state pensions.
How Lenders Calculate Borrowing Capacity
Once all relevant income sources are assessed, lenders will determine your borrowing capacity. Here’s how the process works:
Total Income Calculation: Lenders sum up your various income sources, applying the appropriate percentages for bonus, commission, and overtime.
Debt-to-Income Ratio: Lenders calculate your debt-to-income ratio, ensuring that your total debt payments (including the potential mortgage) do not exceed a certain percentage of your income.
Stress Testing: Lenders perform stress tests to evaluate your ability to manage mortgage repayments under different financial scenarios, such as interest rate increases.
Affordability Assessment: Based on the total income and stress testing results, lenders determine the maximum loan amount you can afford.
Preparing for Your Mortgage Application
To ensure a smooth mortgage application process, prepare the following documents:
- Payslips (Last 3 Months)
- Bank Statements (Last 3 Months)
- Self-Employment Accounts (Last 3 Years)
- SA302s and Tax Overviews (Last 3 Years)
- Pension Statements
- Bonus, Commission, and Overtime Documentation
Why Choose Us for Your Mortgage Needs
At Key To Mortgages, we provide personalised mortgage advice tailored to your unique financial situation. Our whole-of-market acess ensures you have access to the best mortgage deals available, whether you’re employed, self-employed, or retired. We guide you through every step of the mortgage process, from initial affordability assessments to securing the best mortgage deal.
Final Thoughts
Understanding how lenders assess affordability and calculate your borrowing capacity is essential for securing a mortgage that suits your financial situation. By knowing how different income types are evaluated and preparing the necessary documentation, you can enhance your chances of mortgage approval and find the perfect property.
For expert mortgage advice tailored to your needs in Bournemouth, Poole, Christchurch, and beyond, contact us today. We are here to help you navigate the mortgage process and secure the best deal for your dream home.
Contact Key To Mortgages for comprehensive mortgage advice and support. Our dedicated team is ready to assist you with all your mortgage needs in Bournemouth, Poole, and Christchurch.
Your home may be repossessed if you do not keep up repayments on your mortgage.
We offer a free initial mortgage consultation. There may be a fee for arranging your mortgage and the precise amount will depend on your circumstances. We typically charge a fee of £595.00.