If you're looking at remortgaging, don’t worry – the process is usually a lot simpler than buying your first home. Nonetheless, just as with getting any other mortgage, there's always the risk that your application could be declined due to any number of reasons, including affordability.
In this guide, we’ll go over what the affordability checks on a remortgage include, and what to do if your remortgage application gets declined. We'll also discuss things you can do to improve your chances of being approved, as well as how getting an experienced broker like John Charcol can help.
Why Should I Remortgage?
Most mortgage loans will start with some kind of introductory rate, for example a fixed interest rate that remains the same for a set number of years. Remortgaging lets you start a new mortgage loan, which could get you a lower interest rate than the one you’re currently on and decrease your monthly payments. Alternatively, you might want to remortgage so you can get a shorter term and pay off your mortgage sooner, or you may want to release equity from your property. You could see how much you might pay after a remortgage by using our remortgage affordability calculator and repayment calculator.
However, since remortgaging means applying for a new mortgage product you'll still have to go through all the same checks that you would during a standard mortgage application. This means that you might not be approved for a remortgage if you don’t pass the affordability checks for the new mortgage product you hope you get.
What Are Affordability Checks?
Affordability checks are, as the name implies, where a mortgage lender assesses whether or not you can afford the mortgage you’re applying for. When carrying out affordability checks, the bank or lender will look at your finances in great detail.
You’ll have had to go through affordability checks when first applying for your existing mortgage, but it's entirely possible that your circumstances might have changed since then. This means you may not meet the new lender’s requirements, even if you’re applying for a similar type of product as before, and may be rejected.
What Does a Bank Consider for Affordability?
The main factors that banks will look at when calculating your affordability are your income and outgoings. However, there are some other factors that could come into play with affordability calculations.
How Income Affects Affordability
The main thing that lenders will look at when calculating affordability is your income. If you're employed, they'll want to see payslips or your contract, showing how much your income is. If you're self-employed, they'll usually want to see your accounts or bank statements over some time to prove your income levels.
Most lenders will calculate the maximum amount someone can borrow by using a multiple of their income. For mainstream lenders, the maximum is usually around 4.5x the income stated on the application. This means that if your income is £50,000, you would be able to get a maximum loan of £225,000.
It’s important to remember that the income multiple applies to the incomes of everyone who’s applying for the mortgage. If you apply for a mortgage with a partner or family member, both incomes would be counted.
Your monthly income also affects your affordability. The lender will look at your monthly income and outgoings to figure out what you can afford in monthly mortgage and interest payments. They’ll use this information to work out an appropriate mortgage term and ensure the mortgage remains sustainable throughout.
You might find that you have trouble getting a remortgage deal if your income has dropped since your initial mortgage. It could also be a problem if your income has changed to a type that lenders are less willing to accept, for example, if you have recently changed to being self-employed and don’t yet have evidence of a consistent income or now rely on benefits.
How Outgoings Affect Affordability
The other major factor in your affordability calculations is your outgoings. This includes items such as debts, credit card payments, overdraft payments, car finance plans, child maintenance and other living expenses.
The lender will consider your outgoings as well as your income when working out what you can afford in monthly payments over the course of a mortgage term. This is because higher outgoings will obviously limit what you can afford to pay back on a monthly basis.
You might find that your remortgage is declined if your outgoing expenses and debts have increased significantly since you got your original mortgage. This could decrease your affordability to the point where lenders are not willing to take a risk on you.
How LTV Affects Affordability
LTV (loan-to-value) ratios can also affect the amount you can borrow. A lower LTV, where the house mortgage deposit or your existing equity in the property is high and the size of the loan is modest compared with the value of the property, can mean that some lenders will potentially lend you a higher multiple of your income and offer better rates.
How Your Credit Score Can Affect Affordability Calculations
Your credit score will not directly impact your affordability calculations, as your loan or outgoings are already considered as mentioned above. However, lenders will still look at your credit rating and credit history to make sure that they're comfortable with your track record of paying off debts.
This could become a factor linked to affordability if you have issues such as unapproved overdrafts or credit card debt, or if you’re using a large portion of your available credit. This might suggest that you're struggling with finances and that your affordability might drop if you have to take out more loans. Lenders will also look at how many loan applications you have made recently, as this could also indicate that your debt-to-income ratio might increase in the near future.
Adverse credit can also result in the lender charging you a higher rate – which will affect what you can afford in monthly payments - or capping the maximum LTV they’ll offer you, which might mean you can’t remortgage for as much as you initially wanted, particularly if you intended on releasing equity from the property.
Other Issues that Could Affect Your Affordability Calculations
There’s also a number of other issues that could have a significant impact on the new affordability calculation when you remortgage, including the below.
- Decrease in property value - most properties tend to increase in value, but if your property has dropped significantly in its worth on the market, this could make it harder to get a remortgage. This is because the amount you still have yet to pay off your original mortgage will now be a higher percentage of the property's value. Trying to get a mortgage at a higher LTV can make it harder to get approved, and you might need to have better affordability than expected
- Removing a borrower from the mortgage - if you're looking to remortgage to remove someone from the loan and take on the house by yourself, this could mean that you lose an income that was factored into the affordability calculations for the existing mortgage and property. Losing this income will impact the affordability of your application which could make securing a new mortgage for the same property more difficult. If you find yourself in a situation where you can’t afford the mortgage on your existing property you may want to consider moving and downsizing or adding someone else on to the mortgage like a family member
How to Improve Your Chances of Getting a Remortgage
If you've discovered that you can't afford to remortgage your property, you might not be sure what to do next. Here are some things you can do in order to increase your likelihood of getting a new mortgage deal.
Get Advice from an Experienced Mortgage Broker
One of the best ways to get a remortgage before or after a rejection is by talking to an experienced mortgage broker like John Charcol. We'll be able to explain what happens if you can't afford to remortgage, as well as help you find a suitable lender with the best rate for your situation. This may mean considering a product transfer with your current lender, or simply finding a new remortgage lender with criteria that better aligns with your situation.
Expert mortgage brokers like our team at John Charcol have the expertise to help find you the right product for your circumstances. Brokers have access to a wider range of lenders than members of the public since not all lenders will deal with borrowers directly. At John Charcol, we'll also know which lenders can help with tough affordability cases as well as adverse credit cases.
Increase Your Income
If you're struggling with affordability, you could look at trying to increase your income. Obviously, this is easier said than done and may not be possible. Nonetheless if you do manage to increase your income before trying to remortgage, this could help you get a better deal.
Consider Joint Borrower Sole Proprietor
You could also look at increasing the total income on the application by adding another person, such as a family member, onto the mortgage via a joint borrower sole proprietor setup. This would mean their income would be considered when the lender works out affordability, helping you borrow more. The applicant supporting the application wouldn’t be on title deeds of the property so they have no rights to it, but they would be equally responsible for paying the mortgage just as you would be.
Pay Off Debts Sooner
If you have time to focus on doing so, you can look at paying off your debts to reduce your debt-to-income ratio. If you can clear debts and thus lower your monthly costs, you can boost your affordability.
Decrease Your Outgoings
You can also look at decreasing other outgoings to help save more money and ensure that you have more money each month to put towards your mortgage payments. This could include cancelling subscriptions and changing elements of your lifestyle.
Improve Your Credit Score
As we've already said, your credit score won't directly impact your affordability for a remortgage loan but it can result in a lender rejecting your application, charging you a higher rate or capping your LTV.
Therefore it’s a good idea to look at improving your credit score in order to show lenders that you’re on top of your finances and to demonstrate that you're a reliable borrower.
Release Less Equity
When you remortgage to release equity, you essentially raise your LTV (this is assuming your property hasn’t dramatically released in value) and a higher LTV means more risk for the lender.
If you’re having issues with affordability upon applying for a remortgage, you may want to consider simply remortgaging for the outstanding loan amount on your existing mortgage, or reducing how much equity you intend on releasing. This will lower the amount you want to borrow and help make the mortgage more affordable.
How Long Does It Take to Remortgage?
Remortgaging can be a long process, although it’s more straightforward than buying a house in the first place or getting a mortgage to move home. It can take between 6 and 8 weeks to get a remortgage arranged, though if there are any issues with the application or property it can take longer. If you're worried about your affordability and possibly getting rejected, definitely speak to a mortgage adviser who can guide you towards your best options.
You should always start looking for a remortgage deal up to 6 - 7 months before the fixed rate ends on your current mortgage to avoid going onto your lender’s more expensive SVR (standard variable rate) and to ensure you have plenty of time to plan ahead and find a lender with affordability criteria that aligns with your situation.
It can be quicker to look at getting a product transfer from your current lender as they don’t assess your affordability and income unlike a new lender would for a remortgage. Whether a product transfer or remortgage will be cheaper for you will depend on your situation and the lender, so it’s best to speak to a mortgage broker who can guide you in the right direction.
Struggling to Remortgage Due to Affordability: Summary
If you can't afford a remortgage, it can leave you feeling trapped as a prisoner in your current mortgage deal. While you might have been happy with that deal initially, you may now be able to save a lot of money if you can find a new and more competitive remortgage offer.
Getting a remortgage will mean you have to pass many of the same affordability tests that you went through to get your initial mortgage. However, it's not uncommon for circumstances to have changed, leaving homeowners unable to afford a remortgage.
Whether you've been declined for a remortgage, or whether you worry about your remortgage affordability, you can improve your chances of getting a great deal by using an expert mortgage broker. Here at John Charcol, we have years of experience in helping people get through affordability checks, finding the right lenders for their situation and getting a great deal with a competitive interest rate. Get in touch today to see how we can help.