Mortgages being declined on affordability?
Mortgage lenders have stricter rules since the mortgage market review. This means more people are now being declined for a mortgage as they fail on their mortgage affordability.
It’s important to understand why your mortgage may have been declined based on your affordability.
Mortgage lenders may offer a mortgage in principle and then then you may then get declined for a mortgage when you make a full mortgage application to get a mortgage offer.
Being declined for a mortgage based on affordability isn’t the end of the world. You may still be able to get a mortgage with a specialist mortgage lender or by addressing the reasons why your mortgage was declined on affordability.
You can see a detailed guide on how mortgage lenders work out your mortgage affordability here.
Why will your mortgage be declined on affordability?
There are many reasons why your mortgage could be declined on affordability but they will usually boil down to your credit score and history, your income and the property.
Declined because of too much debt
When assessing your mortgage affordability the mortgage lender will usually look at your credit file to see how much debt you currently have.
If you have way too man debt commitments then your mortgage may be declined on affordability.
The mortgage lender may fee you have too much debt and you may struggle to keep up on all your debt repayments or the mortgage lender may feel your monthly mortgage repayments will just about fit inside your disposable income after all your other debts have been paid.
In any case, some mortgage lenders may just have a maximum number of debt accounts that a user can have before they will automatically decline the mortgage based on affordability or the mortgage lender may have a maximum debt to income percentile that a user can have before they will decline the mortgage based on affordability.
Declined because of your credit score
The mortgage lender may discover things on your credit score which it doesn’t like such as:
A debt management plan
A home reposession
Although you may be able to find a mortgage lender who will lend to you even with bad credit you may need to use a specialist mortgage broker such as a bad credit mortgage broker.
Different mortgage lenders have different criteria for how they treat the things on your credit file. E.g a mortgage lender may not decline you on affordability if you had a CCJ but it was satisfied years ago. Other mortgage lenders may decline you based on affordability for the same thing.
Declined because of your monthly expenditure
If your monthly expenditure is too high you may find that your mortgage could be declined on affordability.
Mortgage lenders like to see that you have some room between what you earn and what you spend. This is called your disposable income.
If your disposable income is not big enough to cover the monthly repayment cost of a mortgage then your mortgage application could be declined based on affordability.
When you initially get a mortgage in principle the mortgage lender may not look in-depth into your finances but once it comes round to making a mortgage offer you will find that most mortgage lenders will take a deeper look at your finances.
Mortgage lenders also look for transactions which may indicate that you aren’t good at handling your finances well. This could be gambling or constant payday loan repayments.
Many prospective borrowers have been declined a mortgage based on failing their affordability for this very reason.
Declined because of your mortgage deposit
If you haven’t got a large enough mortgage deposit then you may find that most mortgage lenders may decline you based on your affordability.
You may be able to use a government scheme to increase your mortgage deposit or reduce the cost of the property price and thereby reducing how much you need to pay down as a mortgage deposit.
Some of the government schemes you may be able to use to avoid your mortgage being declined on affordability include:
- Lifetime ISA– gives you a government bonus of £1,000 if you save a maximum £4,000 a year.
- Help to buy ISA– gives a maximum bonus us £3,000 if you save the maximum allowed of £12,000. Before you get either you should consider which is better. Lifetime ISA vs Help to buy ISA.
- Help to buy equity loan– gives you up to 40% as a 5-year interest-free equity loan. You begin to pay interest at 1.75 % after the fifth year and 1% plus RPI for every year thereafter.
- Shared ownership– You can buy between 25% to 75% of the property initially with a shared ownership mortgage and then buy more using a staircasing mortgage.
- Armed forces help to buy– similar to the help to buy equity loan but specific for the armed forces personnel giving them an increased chance of acceptance.
- Rent to buy– This is the right to buy scheme on which this guide is currently discussing. A different marketing name is just used. Watch out for this when shopping to avoid missing out on eligible properties due to confusion.
- Right to buy– allows you to buy your home at a discount price.
- Preserved right to buy– same as above.
- Right to acquire– similar to the above.
- Depending on where you live, you may also be able to take advantage of home buying schemes provided by your local council. Example: In Norwich, the local councils provide the Norwich home options scheme.
Most mortgage lenders have strict lending criteria and will not lend beyond their loan to value rates.
A mortgage broker will likely advise you on what mortgage lenders may be willing to lend to you based on the mortgage deposit you have.
Declined because of your salary
If you don’t meet the mortgage lenders mortgage multiple criteria then your mortgage could be declined on affordability.
Mortgage multiples are a number which mortgage lenders use to multiply your income with to see the maximum they may be able to lend you. A mortgage multiple is better known as an income multiple.
Most mortgage lenders may have a mortgage or income multiple between 3 and 6.
Your salary is a main determining factor on if you could afford a mortgage or not. Mortgage lenders usually use their mortgage multiple as the first basis of your mortgage affordability. If you don’t meet the minimum salary requirements for a mortgage then your mortgage application may be declined based on your affordability.
The only alternatives you may have in this case will be too buy a property with a smaller price or wait till you get a job with better pay.
Different mortgage lenders have different mortgage multiples and to avoid getting declined based on affordability you should at least have an idea of what these mortgage multiples are before making an application for a mortgage offer or a mortgage in principle.
A mortgage broker may have an idea of what these mortgage multiples could be and be able to place your mortgage application with the best mortgage lender suited to you so you avoid your mortgage being declined on affordability.
Example: A mortgage lender who uses an income multiple of 5 will decline you based on affordability if you apply to their mortgage product for a £500,000 mortgage but you only earn £50,000 which makes you eligible for a maximum mortgage of £250,000 based on their income multiple.
Declined because of the type of income
All mortgage lenders will accept salary paid through PAYE and some mortgage lenders will accept benefits and other supplementary income but they will only accept a certain percentile of your supplementary income.
This percentile differs from one mortgage lender to another.
If your mortgage is made up primarily of supplementary income such as benefits then you may need to find a mortgage lender who accepts a high percentile of those if not your risk your mortgage being declined on affordability.
Benefits and supplementary income which mortgage lenders may accept include:
Overseas earned income
- Attendance Allowance benefit
- Carer’s Allowance benefit
- Child Benefit
- Child Tax Credit benefit
- Disability Living Allowance (DLA)
- Incapacity Benefit (IB)
- Industrial Injuries Benefit (IIB)
- Maternity Allowance benefit
- Pension Credit benefit
- Severe Disablement Allowance
- Widow’s Pension benefit
- Working tax credit benefit
Declined because of the property
In some cases, the mortgage lender may decline you because the property you want to buy doesn’t fit within their lending criteria
What can you do if your mortgage is declined based on affordability?
Based on why you were declined you may have several options.
You could look to build a bigger mortgage deposit, you could look to find a guarantor, you could look to put down some collateral if the mortgage lender accepts collateral, you could also look to get a different type of mortgage such as a guarantor mortgage.
Your mortgage broker may be able to provide you with advice on what options you have to increase your mortgage affordability.
Use a mortgage broker for your mortgage in principle
You may want to use an independent mortgage broker to help you get a mortgage on your new home.
Mortgage brokers are important as they can access mortgage products from across the whole of the market in some cases.
This could be over 11,000 mortgage products. This may have some advantages rather than going directly to a mortgage lender.
A mortgage broker will look to understand your financial circumstances and then provide recommendations on which mortgage products may be suitable for you based on your mortgage affordability.
After giving you these mortgage recommendations, most mortgage brokers will seek your consent to apply for a mortgage in principle.
This will allow you to shop for your home as more estate agents and sellers may take you seriously and it will also give you confidence that your mortgage is indeed a possibility before you make a full mortgage application.
Once you have found a home you want to buy and are satisfied with the mortgage offer for your mortgage then the mortgage broker will then look to get you a mortgage offer.
This will come with a key facts illustration document that details the features of your mortgage including how much you will pay per month.
It will also contain information on if there are any limits such as early repayment fees, or annual overpayment limits.
If you are happy with everything you can then go on to secure your mortgage with the help of a conveyancer.
Your conveyancer will manage the legal searches on the property to ensure there aren’t any issues with it.
They will oversee the sales agreement to ensure it is in your best interest, they will manage the transfer of mortgage funds, exchange contracts with the seller or their conveyancer, and set a completion date with the seller or their conveyancer.
This will then bring an end to the conveyancing process, at which point you will receive the keys to the house and move in.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.