What To Do if Your Mortgage is Declined on Affordability
What is Affordability on a Mortgage?
Affordability is a measure of how well you’ll be able to pay for a given mortgage. It entails being able to comfortably pay your mortgage on time, taking into account other factors like your debts, bills, and living expenses. Effectively, affordability on a mortgage means being able to pay for the loan while maintaining your lifestyle, and being able to continue to do so even if situations change.
Falling behind on mortgage payments can affect your credit score, so buying with affordability is incredibly important. Affordability exists to ensure you can continue to pay for a property, protecting both lenders and homeowners from purchases that can’t be afforded.
Affordability for Different Mortgage Types
Different property types tend to have nuances for their own affordability requirements, such as:
Buy to Let: These mortgages are typically calculated via rental income of the property. A Buy to Let mortgage can be declined when the property is in close proximity to an undesirable commercial property. Some mortgagers enforce the £25,000 minimum income requirement while the majority only require evidence for some level of income.
Residential: Different from lender to lender, with Loan to Income Ratios (LTIs) ranging from 4-6x usable income. The definition of usable income for your mortgage also varies, with some lenders not accepting certain forms and working off a lower percentage of your total.
Expat or Foreign National: Lenders on Buy to Lets for these mortgage types will use the rental income of the security property (the one you are buying or remortgaging). Buying in your own name may mean you’re stressed higher (125% for basic tax rate vs 145% for higher tax rate), while buying as a Ltd company tends to be stressed at 125% which could mean you can borrow more.
Semi-Commercial: With this mortgage, you could be assessed differently depending on factors like home ownership, good income, good lease covenant (strength of the tenant), and commercial tenants that have been in situ for good time. Some lenders use residential income towards affordability, while others may not use the commercial rental aspect which may make it more difficult to achieve your desired loan size.
Commercial: For investors, lenders use the lease income of the security property (the one you are buying or remortgaging). For business owners, lenders use the net profit of the security property, calculated via the EBITDA method which may add in or deduct parts of your accounts that will change on completion e.g. swapping rent against the new mortgage payment.
Sharia Law: Sharia Buy to Let mortgage affordability is calculated by the received rental income (for re-finances) or the projected rental income (for purchases), and is assessed in the same way as a conventional Buy to Let mortgage. We work with lenders who tend to be more relaxed for blocks of flats (MUFB) and houses of multiple occupation (HMOs) while also offering sharia-compliant products.
What Does a Mortgage Declined on Affordability Mean?
When you’re declined on affordability, it means the lender wasn’t confident in your ability to consistently make repayments on the loan. Reasons may include:
- Inadequate disposable income
- Excess debt
- Certain income elements that aren’t eligible
- Certain illegible employment categories
- Low affordability can lead to declined mortgage applications
This can also be an issue for those with complex income situations or stringent lending criteria.
When your mortgage is declined on affordability, you may need to assess the reasons why and see what you can do to improve your financial situation. Alternatively, you could take out a loan or find a lender who doesn’t have the same restrictive lending requirements.
Find out more about what to do when your mortgage is declined >
Tips to Improve Your Affordability
Sometimes, complex incomes for residential mortgages can be restricted to as low as 50% when considering it for affordability. To combat this, you can work with specialist lenders who may offer more flexible criteria and the potential for larger loans with higher loan-to-value ratios.
For Buy to Lets, a stress test shows how the rent of the property aligns with mortgage and expected interest. Borrowing capacity and stress rates can change depending on interest, which may make it harder for affordability. Working with specialist lenders can offer lower stress rates, allowing for more lenient lending.
Top Slicing
This allows borrowers to use personal disposable income to bridge the gap between rental income and stress test requirements. It can be a particularly useful technique for Buy to Let buyers facing affordability challenges.
Top slicing is an alternative solution to meet lender criteria and enhance borrowing power, offering a viable route to secure funding for those with mortgages declined on affordability.
Bridging Loans
Bridging loans offers greater flexibility, affordability, and speed. As a short-term loan, they help you acquire necessary funds in the interim while waiting for other money to come through. With bridge loans, it can be best to consider your financial situation, such as whether you have other finances on their way or have a significant portion of your income that isn’t being assessed in the affordability calculations.