As borrowing a large amount of money is a risk both for you and the lender, it’s important to ensure that you can afford the repayments for the duration of the term of the mortgage. Therefore, one of the first steps in the mortgage application process is an affordability assessment.
What is a mortgage affordability check?
In order to complete an affordability assessment, a lender will review how much you earn (your income) and how much you spend on bills and other regular payments (your committed expenditure). This is the same whether it’s a joint or sole application.
What are your incomings?
As part of this, you’ll be asked to provide proof of income; if you’re an employee, this normally means copies of your last three payslips, your most recent relevant identification, and copies of your last three bank statements. If you’re receiving any other income, such as from a part-time job, child-support from an ex-partner or any benefits, you’ll be asked to provide proof of these as well.
If you’re self-employed, you’ll usually be asked to provide the last two years of your company’s tax returns, the last two years of other financial statements, like profit and loss statements, the last two years of personal tax returns, as well as the date of your ABN and GST registration.
The next step is to document all of your outgoings. That’s because the lender will need to ensure that your outgoings aren’t so high that a monthly mortgage payment would cause you financial hardship.
What are your outgoings?
You’ll be asked to provide details of how much your bills are each month, including your Council Tax, utilities, mobile phone and any insurance policies you may have in place. You’ll also be asked about any credit card or store cards, personal loans or car finance agreements you may have, and if so what any outstanding balances are. Childcare costs and any school fees are also considered, as are any maintenance payments you may pay for children or an ex-spouse.
Stress-testing your finances
Another key part of the process is the ‘stress test’, which means that the lender will check to ensure that you can still afford the mortgage payment should the interest rate increase, or if your circumstances change. For example, if you were to have a child or to go from two incomes down to one.
Whilst all of this can sound daunting and time-consuming, affordability assessments have been designed to ensure that the amount you’re loaned can be comfortably repaid so that you don’t end up in financial difficulties.
Speak to an expert
You can help to speed up the process by getting yourself organised before your mortgage appointment with all the documentation you need. Also, don’t forget that it will all be worth it in the end, as once you know how much you can borrow, the really exciting part can start… house shopping!
To find out more about applying for a mortgage, get in touch with our friendly team of mortgage advisers - no question is too big or small.