It will come as no surprise that we are all spending more money on pretty much everything than we were 12 months ago. From food to fuel everything has gone up. The expectations are this will likely continue for the next 12 months also.
With all the extra spending we are doing this has an impact on mortgage applications and in this post we will look into it a little more.
The key thing with an increase in the cost of living and underwriting your mortgage is affordability. There are generally speaking 2 methods to assessing affordability when it comes to mortgage applications.
Office of National Statistics (ONS) figures
The majority of high street lenders will use ONS figures when it comes to assessing affordability. ONS figures are in essence an average based on your circumstances (eg a couple with 2 children). These were updated in (and around) April time. The interesting thing with this was that we spoke to a couple of people prior to April and told them how much they would be able to get.
We then ran the figures after the updates and we were finding that the amount they could get was around £10,000 less!
Manual affordability checks
Usually specialist lenders and smaller building societies do their affordability calculations this way. They will go through your bank statements line by line and assign everything to something. For example your just eat order = socialising. That coffee you get on the way to work = socialising. Your lunch time meal deal = food… and so on.
The interesting thing with this is that most people massively underestimate what they spend on food and socialising. We ask people to complete an affordability sheet in our factfind. We then cross reference it with their bank statements and those are the 2 which are most out.
Which is the better?
There is no set answer to this. Generally speaking building societies are a little meaner on the affordability front, but if your expenditure is lower, then it can make be a better option if you are looking to maximise your borrowing capacity.
The cost of living has affected peoples affordability with mortgages. I look at our shopping bills for example and they have only gone up by around £10 to £15 a week give or take. That is around £500 to £700 a year which we would expect to affect affordability by around £2-3,000. Then if you look at utility bills, fuel for your car and so on it soon starts to add up. Which in turn could reduce how much you can obtain.
We can look at the various options if your priority is maximising your borrowing capacity. But I think it also important to consider whether it is worth maximising your borrowing or not. We can help you to do that but it does not mean you should stretch yourself especially as costs are expected to keep increasing for the next 12 months. Everyone is different, different levels of job security, savings, equity etc. We are more than happy to discuss this through with you.
We want what is best for you, we are not here to try to get you to stretch to the largest mortgage but nor will be stop you unless we fundamentally think it is wrong.