If you’re getting ready to remortgage, you’ll know you’ll soon have lender affordability tests to pass.
This is the case whether you are remortgaging with your existing lender or switching to a new one.
The UK’s mortgage market review regulator introduced new rules on affordability for homebuyers and re-mortgagors in April 2014.
Ever since then, property buyers have faced tougher checks before being granted a remortgage.
The screw was tightened further in 2017. The Bank of England announced more stringent rules or ‘stress tests’ in its Financial Stability Report.
This is because it did not want lenders to offer ‘risky’ loans. This is against the background of interest rates remaining so low. It was also because there is such an excellent choice of low-cost remortgaging products right now.
The upshot is that all lenders must now apply an interest rate ‘stress test’ on you when you put in your remortgage application.
This is designed to judge your ability to weather increases in the remortgage rate. The lender will consider if you would still be able to afford the mortgage in the event of an increase in mortgage interest rates; particularly if interest rates had increased by the time any fixed rate period on your mortgage had ended.
So better rates have brought more hoops to jump through. But armed with the right knowledge, you can still prepare to pass the affordability tests with flying colours.
What Happens in the Affordability Test?
Your affordability test will have three stages.
Step 1: Income
First, your annual income is requested and checked. If you’re employed, your lender will normally want to see your latest three months of payslips and your P60 form.
If you receive income from other sources, you can put this forward too. You’ll need to show documentary evidence of it though.
Step 2: Outgoings
Second, your regular expenses will be looked at. This will include your credit card debt, outstanding loans, child and spousal maintenance, school fees and travel expenses.
The lender will also want to see your regular bills. That includes your council tax, gas & electricity, mobile phone contracts and insurance.
Step 3: Credit History
Third is your credit report. Basically, this is an evaluation of how good you are at dealing with credit and debt. It reassures lenders that it’s safe to lend money to you.
If you’ve ever taken out a credit or store card, utility bill or phone account, mortgage or loan, there will be a credit report on you.
You can check yours quickly with one of the three main credit check agencies. Experian is the UK’s largest and will allow you to see a basic credit report for free. The others are Equifax , Noddle and Call Credit which offer free trials.
7 Tips to Help You Pass the Affordability Tests
Note, these are best done in advance of your remortgage application.
1. Pay Off Your Debts
Credit card debt and personal loans throw a big shadow on your affordability potential. Pay off your overdraft as much as possible before you apply for a mortgage. Reduce what you owe on your credit cards. The less you have on credit, the better your credit score.
2. Rein in Your Spending for Now
Tighten your belt in the run-up to your application. Get rid of any services or subscriptions you don’t use much. This could be your gym or TV and film streaming service. Look at how you can reduce some of your regular expenses. Can you find cheaper car or home insurance, or a better deal on your electricity or gas?
3. Make sure You have Registered to Vote
This is essential and so easy to do. All lenders use the electoral roll for their identity tests.
4. Make sure You Pay all Your Bills on Time
A missed payment on your credit report is a red flag to a lender. It’s easy to avoid this by setting up direct debits. Do this for all your important monthly payments such as your mobile phone bill.
5. Don’t Apply for a Loan in the Run-Up to Your Application
Any loan application will stand out on your credit report when the lender checks it. Our best advice is not to apply for credit in the three to six months before you apply for your remortgage.
6. Beat Your Loan-To-Value (LTV) Band
Every remortgage rate is determined by your LTV. You can be clever with this if you’re near the top of band. Loan-to-value is how the size of your mortgage compares to the overall value of your property.
Putting down a little bit more than the minimum deposit required can boost your attractiveness to the lender. At the very least it will cut the amount of documentation it wants to see. For example, say you’re applying for a £150,000 remortgage on a £300,000 property. (In this case, the loan is 50% of the property value). Instead, apply for £149,000 if you can afford the extra £1000.
7. Get Your Paperwork Out in Advance
Doing this means you’ll have the figures clear in your own head. You’ll also have everything at your fingertips to hand to the lender. Remember that you will need original copies of everything. That includes printed bank statements from your bank.
Expect to gather together:
- Your last three months’ bank statements
- Your last three months’ payslips
- Proof of bonuses/commission
- Your most recent P60 tax form
- Your last three years’ accounts or tax returns
- Proof of savings deposits via statements
- ID documents (usually a passport)
- Proof of address (eg, utility bills or credit card bills)
Finally, remember to take all these steps before you even apply for a mortgage. That way, you’ll be in great shape to get a great deal. You should also walk the affordability test!
If you need help in finding the right remortgaging product for you, we’ll be happy to help you here.