At Moving Experience we’re often frustrated by the “computer says no” mentality of some lenders when it comes to assessing mortgage applications. We regularly see that it can be difficult to place (what should be) great cases, for lovely clients.
Our job as advisors is to fully understand your personal circumstances and needs, and find not only a product but also a lender that will fit your needs. Sometimes, this can be a trickier task than many people are aware, due to the wealth of differences between lenders and the criteria that they use. I thought I’d try to clarify a few common discrepancies, and some misconceptions, that we need to think about when explaining about how much you can really borrow to buy your new home, and why this might be more… or less… than you think.
A great demonstration of the fact that lenders treat affordability differently, is that of a recent application that I worked on. One lender’s affordability calculator offered a maximum loan of only £37k based on the income and living circumstances of a family, and another could offer £84k with exactly the same data.
The reason for the discrepancy in the example above, is that it is not about what income you have, it’s about how you earn it, or where it comes from.
For many years a common misunderstanding was that lending would always be 3.5 to 4 times your salary. To be honest, that was never strictly true, because the multiple was applied to a calculated ‘net sustainable income’ figure rather than simply salary / income.
Those days have now passed anyway, and things are somewhat more complicated now. The only thing that remains true, is that what a lender constitutes as your income, and what you believe it to be, could well be very different. Here are just a few areas where criteria between lenders can vary:
- Basic Salary – Lenders will generally take into account 100% of basic salary.
- Overtime – This may be considered by some, dependent on time and consistency of earnings. Some lenders will take 50%, some may take more.
- Commission – Again, this can usually be taken into account, usually on the basis of past performance. Ideally with a stable track record.
- Bonuses – An attendance bonus could be affected by just 1 sick day, so don’t count on including bonuses. For a lender, it’s not guaranteed.
- Car Allowance – Some lenders assume that your job will require a car, and that the money will be spent on that. There’s others that see it as another source of income
- Type of contract – Fixed term, temporary and zero hours contracts will need to be declared on application. Do these contracts mean you can’t get a mortgage? No, not necessarily. Some lenders may consider applicants based on 12/18/24 months history.
- Employment Status – Being self-employed will generate additional ‘risk considerations’ for lenders. Exactly how your income is assessed may depend on business arrangements; are you sole trader, partner, director of limited company, investor in several businesses, etc.
- Tax Credits / Benefits – Some lenders use all, some are selective, others take nothing.
- Child Maintenance – Generally this is only accepted as a form of income if it’s enforceable by court order or CSA.
There are some standard deductions taken into account on most affordability calculators such as Utility bills, Council Tax and Maintenance/Service charges for the property. Other deductions to consider are:
- Nursery fees / Child care – upon which your ability to earn is often reliant
- Child Maintenance payments – whilst not always accepted as an income (see above) it will always be taken as a deduction.
- Lifestyle spending – May be judged based upon assessment of bank accounts, or possibly based on application information. Obviously we all need some sort of life outside of home, and this may be considered.
AND FINALLY … How long will you earn?
One final consideration (which could be a whole topic in its own right) is retirement age. Rightly or wrongly, many lenders currently assume that 65 is the age at which you will cease to earn an income. To borrow beyond this, pension arrangements may be requested to prove affordability post-retirement. This is beginning to change as government expected retirement ages are increasing, and many people are also choosing to work for longer. However, this is still something to think about if, like me, you’ve moved in to the ‘over 40’s’ bracket.
As you can see, mortgage lenders are not ‘all basically the same’, which is why it pays to talk with an advisor, who knows and understands all the little nuances of a huge number of lenders out there. A great advisor should be able to find the deal that works for you, and your unique situation.
If you would appreciate some advice about your own mortgage and protection arrangements, please call and speak to Matt 0117 2047440.