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Mortgage affordability – a key lending factor
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Many choose a mortgage loan based on the mortgage interest rate alone. And even though there are a number of other aspects which should be considered, many bank customers give these little attention. However, in certain circumstances this may put the borrower at a substantial disadvantage.
Affordability is a critical factor which influences a bank’s decision about whether or not to grant a mortgage loan. The term refers to the ratio between the borrower’s gross income and the projected cost of property maintenance plus mortgage payments. Should a bank conclude that these costs exceed your financial capacity, it may refuse to grant a loan. Some providers will offer lower rates to potential mortgage borrowers if they happen to have an excellent affordability. You can find out more about which factors are relevant to mortgage affordability and the differences between bank procedures in this article.
How banks assess mortgage affordability
When granting mortgage loans, banks generally take the view that the total mortgage costs must not exceed 33 per cent of the borrower’s gross income. However, there are financial institutions on the market which are prepared to offer mortgage loans beyond this one-third limit. The calculation of mortgage costs includes interest and amortization costs as well as property maintenance costs:
- Interest charges: Banks assume a mortgage interest rate of 5 per cent – a value which can be well above the actual interest rate, especially if, as in recent years, there has been a sustained period of low interest rates. The banks use this imputed rate to ensure that borrowers can meet the cost of rising interest rates.
- Loan amount and amortization: Banks usually have an amortization term of 15 years, though like the imputed interest rate this may vary. The monthly cost of amortization will depend on the amount of your mortgage loan.
- Maintenance costs and other expenses: Every property has maintenance costs. These may include regular expenses such as insurance premiums, water and electricity costs, as well as occasional expenditure such as repair work. Banks will estimate this annual expenditure at 1 per cent of the property value.
- Gross income: This includes future guaranteed regular income, such as a salary or rental income.
In the following video we explain the basic requirements for the successful financing of a residential property:
The differing interpretations of mortgage affordability
When assessing mortgage affordability, financial institutions may arrive at different conclusions. In some cases the imputed interest rate and amortization charges may differ, whereas in other instances credit institutions may apply different criteria when calculating income levels. The main issue here is usually which revenues can be considered as secure and guaranteed for the future. For example, any of your professional income earned as premium awards or bonuses may be disregarded, or only partially taken into account.
Sometimes a young couple’s family planning arrangements may have an impact upon mortgage affordability. Thus, a partner’s income may not be included in the calculation, or may only be given partial recognition, because banks assume that the arrival of one or more children will reduce the combined income. If your mortgage loan acceptance seems to be in question, seeking comparative offers may be worthwhile.
Using an online mortgage affordability calculator will always be just a rough guide. In a personal meeting we can give you details of current interest rates and take your specific requirements into account. The aim of our consultancy is to provide you with a secure and transparent financial plan which offers you the best market terms available.
Current mortgage rates
The displayed interest rates are the best rates currently available. Your personal interest rates may vary depending on LTV, affordability, mortgage amount and the location of the property.