A guide to mortgage underwriting rules
In the UK, mortgage lenders have to adhere to strict rules when deciding who to lend to.
It’s a lender’s responsibility to make sure they only offer what borrowers can afford to pay off, so there are lots of checks involved when trying to get a mortgage.
● Your income
● Your normal expenditure
● Your debts
● Your personal circumstances
Your mortgage lender needs to know exactly what you bring in each month, including your salary, bonuses and self-employment, to work out what you can afford to pay off – even if interest rates go up. Your income will be offset against your regular monthly payments such as credit card payments, existing loans, family commitments and pension payments, to come up with an accurate picture of what you can and can’t afford.
The bank or mortgage lender also has to think about:
● Whether the term runs past your expected retirement age
● Any changes to your household, such as caring for elderly parents or having children
What is an interest rate ‘stress test’?
In 2017, the Bank of England announced to ensure mortgage lenders are even more responsible towards borrowers, including the need for a mortgage interest rate ‘stress test’. Many lenders have in fact been stress-testing in this manner when it was first recommended in 2014 – it involves testing a borrower’s ability to afford drastic increases in the mortgage rate – at 3% above the rate that will apply when any introductory offer ends.
This stress test ensures that borrowers can afford to repay their mortgage even if mortgage rates skyrocket.
For example, mortgage lenders will now need to make sure that even if you’re only paying £700 per month on your repayments, that you could theoretically afford a significant increase in rates, which could potentially see payments more than double.
What will this mean for you?
Some borrowers may find it more difficult to get a mortgage as a result of these new rules but, in reality, many banks and lenders have been following these guidelines as best-practice since they were first introduced as recommendations in 2014.
Although they are now mandatory, many mortgage companies will already use them when assessing your eligibility to borrow.
Whether you’re a first time buyer or an existing home owner, it’s always worth shopping around to find the best mortgage deal for you.
This guide to remortgaging was produced in collaboration with L&C, the UK’s leading fee-free mortgage experts.