When a bank assesses your mortgage application there are 5 key factors they look for. Combined these factors add up to an overall assessment of your ability to take on and service the debt and the risk that the lender would be taking on. Having an understanding of these factors can help you when applying for your next mortgage (or top-up)
- Credit History. The bank here is looking for evidence of a good track record when it comes to taking on debt. You can get a copy of your own credit report (which is what the banks see) from the ‘mycredithistory’ website. This will tell you whether there are any potential issues which could influence the bank’s decision.
- Capacity. This refers to your ability to service the mortgage (make regular repayments). In this regard, the lender will be looking for evidence of income at a level consistent with the amount of debt. Income could include your salary, business earnings, rental income, etc. The lender will also be interested in your regular outgoings how much of your income is committed to other expenditure? Also related to capacity is an assessment of income reliability over the medium term.
- Collateral. Linked to what is referred to as the Loan to value ratio, this allows the lender to determine what level of security they have to fall back on if you default on the mortgage.
- Capital. Although you will typically be making mortgage repayments from your regular income, the lender will also be interested in knowing about your other assets – this will help them to assess your ability to service your mortgage (make regular repayments) should you lose your job or be unable to work for a period of time.
- Conditions. Lenders will typically want to understand how you plan to use the money – particularly if you are applying for a top-up. However, there are other factors which will affect the conditions placed on the lending eg. If you are building your home, the bank will require certification at various stages during the building process before advancing funds.
If you’d like help with any aspect of your mortgage, we would encourage you to engage a professional mortgage adviser. They understand what lenders are looking for, can provide advice on how best to position your situation with a lender and advocate on your behalf. They can also negotiate interest rates and other terms on your behalf. Use our find an adviser service.