Mortgage lenders must make sure you take out a mortgage you can afford. Find out what they are likely to check and the information you will have to provide.
If you are getting a new mortgage, increasing your current mortgage or remortgaging with a different lender, your lender must check that you can afford your repayments now and in the future.
To do this they will need information about your income and outgoings.
Proving your income
You will need to provide evidence of your income to show how much you can afford to borrow.
If you are employed this might mean showing your payslips. If you are self-employed or a contractor, you might have to show your tax returns, accounts, business plan or projected earnings.
If the income you will use to cover your mortgage payments comes from more than one job, you will usually need to show evidence for each job.
For other types of income, like shares, bonuses or a pension, you may have to provide documents proving how much you receive.
You will have to tell your lender if you expect:
- your income to go down
- your outgoings to go up
The evidence you will need for each type of income will vary between lenders. Whatever they need from you, they must be sure that your income will cover your mortgage as well as your regular basic spending and other commitments.
Confirming your spending
Your adviser or lender will also need to know what you need to spend to keep up a basic standard of living. They can then work out how much of your income you can afford to spend on your mortgage.
They will look at your spending in three categories:
Repayments and other commitments
This covers payments you know you will have to make, including:
- debts you are paying off, like credit card bills, loans or hire purchase payments
- child maintenance and alimony payments
This is what you regularly spend on the things you cannot do without, such as:
- household cleaning and laundry
- gas, electricity and other heating costs
- water bills
- essential travel (such as travel to work or school)
- council tax
- buildings insurance (it is usually a condition of your mortgage that the building must be insured)
- ground rent and service charges (for leasehold properties)
Basic quality of living costs
This is what you need to spend on occasional essentials, with some allowance for leisure costs, including:
- household goods (such as furniture and appliances) and repairs
- personal goods such as toiletries
- basic leisure costs, including non-essential transport
- TV licence
The exact details you are asked for will vary between lenders, but you should expect to discuss your regular spending in all these areas.
If you want an interest-only mortgage, the lender will also ask you to explain and show proof of your plan for repaying the full loan when the interest-only period ends.
The lender will check that your plan is still in place at least once during the interest-only period.
Checking future affordability
Your mortgage lender will look at how interest rates are predicted to change over a minimum of the next five years, to see how they might affect your mortgage payments.
If your payments are likely to go up, they will check that you could still afford them if your other outgoings and your income stayed the same.
It is possible that rates could go up by more than predicted. If this happens, your payments could be higher than predicted too.
Paying your mortgage after you retire
If your mortgage is due to last until after you retire, your lender will check you will be able to afford your payments with the income you expect to have then.
The information they need about this will depend on the lender and how long it is until you expect to retire.
Changing an existing mortgage
If you already have a mortgage and want to remortgage, a lender may be able to arrange this without doing all the affordability checks.
The lender will still have to do the checks if you are:
- increasing the amount you are borrowing
- making a change that might affect what you can afford (for example, extending a mortgage into your retirement, or removing someone from the mortgage contract) or remortgaging from another lender