Money Dashboard is proud to announce the launch of TrueView; an innovation being tested in a live environment as part of FCA’s regulatory sandbox. You can find out more about it here. Want to try it out but haven’t had an invite yet? Email us at firstname.lastname@example.org.
What is affordability?
Affordability is the amount you can afford to repay on a loan and takes into account your income and what you need to spend each month, on things like household bills, food and other credit commitments.
How is affordability calculated?
In the past, mortgage lenders based the amount you could borrow on a multiple of your income. This is known as the loan-to-income ratio. For example, if your annual income was £50,000, over 25 years you might have been able to borrow 4.5 times this amount, giving you a mortgage of up to £225,000. Lenders would also consider things like your credit report and occupation.
Since 2014, lenders have also had to consider how much can you afford to pay back each month. They do this by considering your income, and then deducting various personal and living expenses.
An assessment of affordability considers things like:
- Your credit card debt and repayments
- Outstanding loans and Hire Purchase Agreements
- Child and spousal maintenance
- School and Nursery fees
- Travel expenses
- Insurance Policies
- Bills, including; council tax, utilities, mobile phone contracts
- Rent or Mortgage Payments (but only when these will continue with the loan being considered)
Your finances are also then “stress tested”. This is to make sure your ability to repay a loan would continue if interest rates rose during the term of your loan.
Why is my affordability lower than I think it should be?
Most mortgage and affordability calculators use modelled, rather than real data. These calculators usually advertise the highest loan values and best interest rates, to drive consumers to get advice or apply for a mortgage via them. So it’s not surprising that 1 in 3 purchasers can’t get the mortgage they were expecting to! People who apply for a mortgage often either underestimate their spending in certain areas, are planning on changing their position significantly (e.g. a gift to pay off a loan or help with a deposit) or intend to change their lifestyle after getting a mortgage.
Your TrueView affordability is calculated based on your actual spending habits and financial position today. We are testing TrueView as part of the FCA Sandbox and have designed it to give a market standard (and to be honest, fairly conservative) view of your affordability, based upon your unique circumstances. As an independent company our interest is in providing you with the best possible insight into your money so you can make the best decisions for you. TrueView helps you understand what you can afford to repay by being aware of what you really spend on things like household bills, food and going out.
Will my TrueView affordability assessment impact my credit score?
No. Your assessment is entirely based on the financial information you provide by connecting with Money Dashboard, and does not utilise traditional credit reports. Using TrueView may help you to understand how your credit commitments (your bills, loans etc.) are affecting your credit score. We recommend that everyone considering a loan or mortgage also obtains a copy of the credit report; this can be done for free via a service like Noddle, and also does not impact your Credit Score.
What can I do to improve my affordability?
There are a number of things you could do to improve your affordability:
- Try to pay off as much of your debt as possible:
- Reduce your committed expenditure (your credit card debt, hire purchase agreements and loans)
- Pay off payday and unsecured loans (If you’ve had a payday loan in the last 3-6 months, many lenders will not lend to you).
- Reduce your monthly bills (such as water, gas, electric, phone, broadband). You could try a switching provider like USwitch to compare and identify potential savings.
- Check you insurance payments (contents, travel, pet, life etc.); many overlap one another, and so could be reduced.
- Rein in your spending before you apply for a mortgage:
- Budget carefully for at least 3 months – setting a budget helps you manage your money more effectively & keeps your bank balance in check. It shows prospective lenders you can live within your means.
- Start saving for a deposit (see advice on Help to Buy ISAs).
- Avoid new credit commitments (e.g. credit cards, loans, mobiles, broadband, utilities), unless they reduce your expenditure.