What are the three biggest factors that influence a Mortgage?
So, when it comes to affordability for a mortgage, it’s important to understand that it is a very fast-paced landscape with a lot of moving pieces. Therefore, there are often situations where things change quite rapidly.
As an example, back in February of 2022, there was the biggest reduction in 18 years as a result of 518 mortgage types being discontinued.
Naturally, there are a couple of different reasons for this. The Bank of England raised their rates quite a bit at the time, which meant that many lenders had to ensure their mortgages remained viable by jettisoning things that were no longer practical.
When exploring mortgages, it should be noted that there are three primary factors which influence mortgage availability. These factors can make the difference between rejection and approval for applicants.
The first factor is the mortgage affordability test.
Back in 2014, the Financial Policy Committee brought in two primary recommendations. These were a direct attempt to make sure that the financial collapse of 2007 to 2008 never happened again. However, the most controversial part of this was the mortgage affordability stress test.
This test was a recommendation that mortgage lenders used to check the ability of the borrower to pay at a stress-interest rate. This interest rate is typically three percentage points higher than the average rate that the mortgage would be out. This means that if there is a sudden increase in mortgage rates, the borrower can still afford to make the payments.
The second main criteria is the loan to income flow limit.
This is the ratio between the average income of the household against the overall amount that is to be borrowed. To put this into simple terms, imagine that the average salary in the UK was £29,600. If somebody with that salary tried to purchase a house that had a price of £348,804, then the loan to income flow limit would be 8.48%.
Generally, this limit is capped at 4.5%, with the ability of the lender to approve mortgages that have a higher limit than this restricted to roughly 15% of overall lending. It is worth noting that the bulk of people are not buying a property by themselves, nor with the loan that they take out 100% of the asking price. Furthermore, most will not be buying the exact average property.
It’s probably worth noting that Income is not the sole deciding factor when it comes to a mortgage. Financial circumstances, credit history, spending habits, and your credit score each have a unique impact on your chance to secure a mortgage. Furthermore, your appearance in the electoral role and whether or not you’re self-employed also play a role in deciding what kind of mortgage you can get.
The final factor when considering affordability for a mortgage is to work out whether or not you can get access to a mortgage is your deposit.
The bigger your deposit is, the more favourable a mortgage rate you can get. However, once you get past the 25% deposit mark, this rate can vary substantially.