Will you pass mortgage affordability checks?
The countdown to new mortgage affordability rules has well and truly begun. Changes following the mortgage market review (or MMR) will come into full effect on 26 April – just a few days' time – and unfortunately that means it could be a whole lot harder to get that longed-for mortgage. So, will you pass mortgage affordability checks?
What are the new checks?
In a nutshell, the new checks will involve you proving beyond doubt that you can afford the mortgage repayments – both now and when rates start to rise. You'll be expected to provide evidence of your income and everything you spend, including essential payments and non-essential outgoings, covering everything from utilities, council tax and rent/mortgage payments to leisure costs, entertainment and holidays.
Providing a simple layout of money coming in versus money going out won't be enough, and nor will it be sufficient to try and convince the lender that you can afford the payments based on your salary – it's all about evidence, not income multiples, with the whole point being that you need to prove you're not already stretching yourself too thin.
What can I do?
The key is to be prepared. You can't go into a mortgage broker's office without having the necessary evidence and nor can you even think about getting a mortgage without spending a bit of time going over your budget first, and if there are improvements to be made you need to do them before you start the application.
Step 1: Scrutinise your budget. You can't hope to be accepted for a mortgage unless you know your own budget – if you can't prove to yourself that you can afford the repayments how will you prove it to a lender? – so if you take a blasé attitude and have no idea about proper money management it's time to make a change.
You'll want to start by taking a close look at your paycheque so you know exactly how much money you've got coming in (as well as how much goes on the likes of pension contributions or student loans), and make a list of every regular, essential payment that will leave your account without you thinking about it. Then it's time for step 2…
Step 2: Keep a detailed record of everything you spend. And this means absolutely everything. Essential payments are a given, but you'll need to include the likes of holidays, meals out, money spent on housekeeping (including food bills and any cleaning services), TV subscriptions, credit cards and travel costs, and any regular savings or private pension contributions you make will need to be recorded too.
It might be a good idea to keep a list of every single outlay for a month or two so you can get a general idea of your outgoings, giving you a more accurate estimation of monthly costs. You'll be able to see how much you've got left over at the end of the month and will truly see where all your money goes – we all know how easily it can disappear – and that way you can see if you can make any cutbacks or whether you'll have enough to cope with any rise in mortgage repayments.
Step 3: Make adjustments where necessary. If you live from paycheque to paycheque without much leeway, you'll need to start making some adjustments. When mortgage rates start to rise your monthly outgoings could significantly increase, and if you wouldn't be able to cover it comfortably you won't get that mortgage.
You'll want to look at ways you could rein in non-essential spending – such as cutting back on meals out, foregoing that Netflix subscription, paying off those credit cards or having fewer holidays – and you'll need to start doing that before you make the application, as lenders could well use bank statements as evidence of your spending.
In some cases being unable to prove sufficient affordability will simply mean you'll be eligible for a smaller mortgage than you'd like, but being rejected outright will have bigger consequences and could make it more difficult to be accepted with a different lender in the future.
So, if you're already struggling to make ends meet you'll want to focus on making the necessary improvements, and you'll need to consider your credit rating too. At the very least you'll need to start scrutinising your budget and keeping records – it may take longer to prepare sufficiently but it'll be worth it in the long run, so start getting prepared and you could pass mortgage affordability checks with flying colours.
Sam: 23rd Apr 2014 16:24:00