Mortgage lenders take several factors into account before deciding how much they will lend to borrowers. To minimize their risk, lenders perform a detailed analysis on the income and expenses of the borrower with a view to defining a financial sum that is affordable for the borrower.
Historically, mortgage lenders would simply provide mortgages based on the borrower's income. For example, if you were earning £60,000 the lender might have offered three to five times of this amount or between £180,000 and £300,000 without taking any other factors into account. Mortgage lenders still use this criteria but also look at wider financial considerations to provide a holistic financial assessment.
In April 2014, the Financial Conduct Authority (FCA), the UK financial regulator, carried out an extensive review of the mortgage market, named as the Mortgage Market Review (MMR). After the review, the FCA has announced more stringent rules for lenders, making it tougher to get a new mortgage.
With the new rules, a mortgage lender will decide on the loan amount after taking into account three factors:
You can read more about the FCA and what it does for you in our Mortgage article, FCA Mortgage Legislation.
Mortgage lenders want to know the mortgage borrowers' sources of income. Lenders take the following income into account:
You will be expected to provide documented evidence of your income including pay slips and bank statements as proof of income. If you are self-employed, you have to provide your business account statements, bank statements, and information on income taxes paid to the mortgage lender.
Mortgage rules and legislation state that mortgage lenders cannot provide a mortgage of more than 4.5 times of the annual income. So a borrower with an annual income of £60,000, cannot get more than £270,000 in mortgages.
Apart from income, lenders also use expenses as a criteria to determine the mortgage amount. They want to make sure that you can afford the monthly repayments along with your other expenses. Lenders will use some of the following expenses to determine your affordability.
Apart from fixed expenses, the lender will also ask you for an estimate of other expenses like spending on clothing, eating out, etc. Lenders may ask for your bank statements to confirm that your estimates are correct.
Along with assessing income and affordability, mortgage lenders are also required to carry out a 'stress test' on your repayment ability. A stress test will take into account any future events which may affect your repayment ability. Such events will include:
As part of these tests, some questions the lenders may ask the borrowers are:
Based on these tests, the lenders will get an accurate idea of the present and future repayment ability of the borrowers, and decide the mortgage loan amount accordingly.
Use our remortgage calculator to calculate the repayment amounts for different mortgage amounts at different interest rates.
Of course, not all the cost or remortgaging lays with the interest rates and mortgage deal, there are other fees you need to consider. In our next remortgage guide, we look at mortgage fees in detail.
Next: Remortgage Fees Guide