Frustrating as it may be not everyone is equal in the eyes of mortgage lenders. Cast your mind to times you applied for a loan and you will recall that the amount and rate were determined by your personal circumstances. Factors such as your credit score, your debt to income ratio, and the amount of deposit on the loan make a big difference.
As you gathered much of it has to do with risk. Lenders typically use risk-based pricing models when assigning interest rates. Simply put, this means they charge more interest for riskier borrowers (those with bad credit, high debt ratios, etc.). This is why lenders offer different mortgage rates to different borrowers. In general, lenders will be interested in understanding how your income compares with your outgoings to determine how likely you are to be able to pay your mortgage. Here are a few variants they will typically take into account:
Your combined Income:
There are many misconceptions in this area, here are the factors that lenders take into account when calculating your income:
- 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. Commission – Again, this can usually be taken into account, usually on the basis of past performance. Ideally with a stable track record.
- Car Allowance – Some lenders assume that your job will require a car and that the money will be spent on that. There are others that see it as another source of income
- Tax Credits / Benefits – Some lenders use all, some are selective, others take nothing.
Your employment status:
Whilst the amount you earn is important, how you earn it is also important as it affects the level of risk. Here are a few key factors:
- Type of contract – Fixed term, temporary and zero hours contracts will need to be declared on application. Whilst your contractual situation may affect the terms you secure they don’t typically stop you from getting a mortgage. Some lenders will extend their consideration to income history and track record.
- 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 a sole trader, partner, director of a limited company, investor in several businesses, etc.
- 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.
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 which is a key factor in your ability to work if you have a young family.
- 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 an assessment of bank accounts, or on application information. Obviously, we all need some sort of life outside of home, and this may be considered.
As always it’s very important to consider your personal circumstances carefully before you draw any conclusions. In any case, particularly if you are concerned regarding your ability to secure a good mortgage rate, a mortgage broker will be able to give you a wider picture of different lenders.
At Spot on Mortgages, we don’t charge a fee for our advice so get in touch with us if you wanted to speak to us further.
Your property may be repossessed if you do not keep up repayments on your mortgage.