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Advice If You Have Been Rejected for a Mortgage Due to Affordability

Mortgage rejection can sting and be very frustrating if you're confident you have the income to keep up with the payments! This guide acts as a starting point for a strategy to return from an affordability rejection with confidence.

What to do if you get rejected due to mortgage affordability?

Every UK mortgage lender will need to run affordability checks, and being turned down on this basis can be a blow.

However, while you will always need to demonstrate that you can afford a home loan, how lenders calculate this varies significantly.

Here we've recapped the best advice from the Revolution Brokers team about moving forward from a mortgage rejection. If you'd like help finding an affordable mortgage, get in touch on 0330 304 3040, or email the team at [email protected].

Why do Mortgage Lenders Reject Applications Due to Affordability?

This type of rejection means that the lender didn't feel you'd be able to keep up with the mortgage repayments. There could be any number of reasons why:

  • Low income, or not enough disposable income.
  • Other debts and high outgoings.
  • Inability to consider variable income in the calculations - such as overtime, bonuses or commissions.
  • The lender's income multiples did not permit them to offer the amount of borrowing required.
  • Issues with credit history.
  • Low deposit.

The good news is that while one lender might turn down an application because of one, or several of these factors, another lender might take a very different view of your application.

Why do Mortgage Lenders Assess my Affordability Rating Differently?

Every lender is different and has individual policies and calculation methods.

For example, the maximum mortgage is almost always based on a multiplication of your average annual income. If you earn £40,000 a year, one lender might offer up to 3.5 times that income, and another five times that income - so simply applying to a different bank might change your mortgage offer from £140,000 to £200,000.

How Does a Mortgage Lender Calculate the Maximum I Can Borrow?

As we've seen, there isn't a fixed calculation - each lender is different.

The typical multiplier is four times salary, but some will offer five times and others as high as six times your yearly earnings.

You'll also find that lenders have different rules regarding variable income, such as bonuses. Some will include 100% of variable pay in the affordability calculation, others will include 50%, and some will only use your basic wage to calculate your annual income.

The key is to know how much you'd like to borrow and select the most appropriate lender whose eligibility criteria you can meet.

How Much of My Income Will a Mortgage Lender Include in the Affordability Calculations?

Many people have income that can include various types of pay - from overtime to annual bonuses.

  • Basic salaries are included at 100% of the annual income value.
  • Regular bonuses and overtime are often accepted as a form of income. Still, lenders can accept anything from 50% to 60% of these earnings, to 100% if you can provide a P60 or documentation to evidence how much this income is worth.
  • Commissions will usually be considered, but typically only at 50% or 75% of the average annual value - some lenders will include 100% of your commissions if you can back them up with paperwork.
  • Employment allowances such as a car or housing allowance tend to be included at 100% of their value, but you'll need to provide evidence about how much these allowances are worth. Some lenders also require documentation showing that this is a permanent benefit.

How Does Self-Employment Impact a Mortgage Affordability Assessment?

There aren't different products for employed and self-employed mortgage applicants, but as with any other variable income type, how a lender calculates your annual income will depend on their policies.

Most lenders will need to see three years of trading accounts and will include the net profit drawn from the business as your annual income. They usually calculate the average over the last three years and use that figure in the affordability assessment.

If you are a Ltd company owner, most lenders will include your salary and any dividends paid out.

For contractors, this works a little differently, and a lender will usually take your day rate and calculate an average annual income presuming you work five days per week to 48 weeks of the year.

Should you be newly self-employed, you will usually need to apply to a specialist lender if you have less than three years of trading history.

Can I Use Other Income Streams to Prove I Can Afford a Mortgage?

You can - although as with variable income, the proportion of other revenue streams that a lender will accept depends on their policies.

Alternative forms of income can include:

  • Maintenance payments.
  • Benefits and pensions.
  • Income from trusts or investments.
  • Rental income.

Many lenders will include 100% of maintenance income, provided it is paid via a court order. Informal maintenance income agreements may not be included or considered at 75% of the value.

What Other Eligibility Criteria Impact My Mortgage Affordability Assessment?

Income is only one factor of affordability calculations; lenders will also look at other factors relating to your finances to calculate whether they believe you can afford the repayments.

  • Expenses - from other debts to costs of living, a lender will want to see that your net disposable income is sufficient to keep up with the repayments. Outgoings might include school fees, pension contributions, insurance policies, travel passes and utility bills.
  • Future contingencies - lenders use a stress test process, to calculate whether you would still be able to afford the mortgage if you find yourself out of work, or if interest rates rise.
  • Deposit - most UK lenders will accept around 10% to 20% as a minimum deposit, although some will accept as little as 5% depending on the circumstances. The higher the deposit, the less risky the application, and the less stringent the affordability criteria.
  • The property - an unusual property is always considered a higher risk, so a lender will have stricter criteria before being able to approve a mortgage on a non-standardconstruction.
  • Your age - applicants over 55 years old are also considered riskier, and some lenders will cap mortgages at age 75 or 85 and can have different rules about your age at the time of the application, and at the scheduled end of the loan term.
  • Sizes of the loan - some UK mortgage providers have caps over which they will not lend.

Can I Get a UK Mortgage If I've Been Turned Down Because of an Adverse Credit Score?

As with affordability calculations, lenders have different rules about bad credit. A lot depends on what sort of issues show on your credit file, what values were involved, and how long ago they occurred.

Revolution can recommend specialist bad credit lenders who can consider mortgage applications in any bad credit scenario, from late payments and mortgage arrears to more severe issues such as bankruptcy and repossessions.

Expert Advice on Mortgage Affordability

Being turned down by one mortgage provider does not mean you won't be able to apply successfully to another - it's vital to know what the eligibility criteria are, how your selected lender calculates affordability, and to apply to the right providers!

Give us a call on 0330 304 3040, or email the business loan broker team at [email protected], and we'll get to work to find you the borrowing you need.

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