Major UK banks, including Santander and Lloyds Banking Group, have announced that they will now take into account the child benefit payments parents received when calculating mortgage affordability. This change, brought in on April 9th 2024, could result in people potentially being able to borrow more when looking for a new home. When you apply for a mortgage, your lender will look at many different factors to see if you can afford the repayments and child benefit will need to be evidenced to be included in this affordability calculation.
Affordability is a word that you will have heard many times if you have been shopping around for a mortgage. It essentially means that your mortgage lender will carefully scrutinise your finances to see if you can afford the monthly mortgage repayments. Since the 2008 financial crash and while house prices in the UK have continued to rise, lenders have been far more rigorous with their checks to see if you are financially responsible and whether the repayments will be affordable every month, today and into the immediate future. If they have any concerns, it may result in you being turned down for a mortgage.
The good news is there are several things you can do to help improve your chances of successfully getting a mortgage, and in this post, we will go through five things you need to consider if you are looking to apply for a mortgage in the near future.
1. Think About Any Future Changes to Your Outgoings
Mortgage lenders don't just think about what you can afford when you apply, they will also look to the future to see if there are any upcoming changes to your life which may affect mortgage affordability. One major life change is having a baby, as the cost of childcare, reduction in income due to maternity / paternity leave or returning to work part time can all affect your income.
If you are pregnant or have a new baby and are applying for a mortgage, remember to take into account the potential childcare costs you will need to pay or whether you are going to have a drop in income if returning to work part time as these can both affect the size of the mortgage you will be able to afford.
2. Self Employed Mortgage Applicants Need at Least Two Years of Income Proof
Being self employed can be challenging when working out mortgage affordability. If you don't have at least two years' proof of income, this can quickly cause issues when applying for a mortgage. Some lenders will also not take into account overtime payments and bonuses which can also cause difficulties if they are a significant part of your income. Self employment shouldn't be a barrier to securing a mortgage, but it is important to have those two years of income proof before you apply. For more information, visit https://www.cmmemortgages.com/mortgage-guides/self-employed-mortgages/.
3. Avoid Using Buy Now, Pay Later Services Like Klarna, Affirm or Sezzle
If you regularly shop online, you will have come across buy now, pay later services such as Klarna or Sezzle. They allow you to split the cost of your purchase over a number of instalments to spread the payments without charging additional interest. Even though these kinds of arrangements don't incur fees for missed payments, they can still show up on your credit file, and they will stand out on bank statements.
These schemes have become increasingly popular, and it is estimated that around 55% of young people regularly use buy now, pay later services. As first time buyers usually fall into this category, if you have a lot of buy now pay later commitments and don't keep up with payments, this can damage your credit rating and affect your mortgage affordability. If you need to purchase something on buy now, pay later, consider using a 0% credit card instead. This is less likely to affect your affordability and can also improve your credit rating if you always make the monthly payments on time.
4. Beware of Cryptocurrency
Cryptocurrency has made money for some lucky people but it may not be a straightforward process if you then want to use this as the source of funds for a house deposit. There are strict anti money laundering regulations in the UK that mortgage lenders use to verify exactly where your deposit came from, and if they suspect it comes from cryptocurrency, this may raise a red flag.
This is because criminals can use cryptocurrency, so it can be difficult to trace exactly where the money came from. However, it might not always be an issue if you can prove to your lender that you bought the cryptocurrency with your own money, and you can track exactly how you made any profits. It is best to get advice from a mortgage adviser who can check the requirements of different lenders and ensure you don't get turned down.
5. Avoid Gambling, as This May Cause Issues with Mortgage Lenders
If you like a flutter on the lottery or a bet on the horses every now and then, this won't cause a problem with getting a mortgage. However, if you frequently gamble, and this can be seen on your bank statements, it could count against you with banks or lenders. As with any discretionary spending, large deposits to gambling companies will be used in affordability calculations, and this could reduce the amount you are able to borrow. If you are going to apply for a mortgage soon, it is best to reduce the amount you are spending on gambling so your outgoings look the best they can possibly be.
Your home may be repossessed if you do not keep up repayments on your mortgage.
OneDome is part of and refers enquiries to the CMME group. CMME is regulated and authorised by the Financial Conduct Authority. For more information please visit https://www.onedome.com/mortgages/mortgages-explained.
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