Q. My wife and I have a joint income in excess of £80,000 and have been in our home in Ilkley for over ten years, in which time the value of the property has gone up considerably, meaning that between its current value and some overpayments we've made on the mortgage over the years, we have a decent amount of capital in the property. We wanted to remortgage onto another fixed rate product with our existing bank, staying at the same level of borrowing, but have been told that we can't due to “affordability issues”. How is this possible?! What have we done wrong?
A. Firstly, it doesn't sound as though you've done anything wrong, per se. Rather, you've fallen into the trap that many high-income earners do when it comes to remortgaging.
As part of the overall affordability calculations, which lenders use when you apply for any sort of mortgage, they will look at your debt to income ratio; simply explained, this is the amount of unsecured debt that you have. The best example – and most frequent issue for people in this situation – is car finance. If your earnings are significant, then a £400 or £500 per month car payment may seem comfortable. However, a potential lender will view the entire amount that is outstanding against how much you earn per year. Therefore, if your earnings are £50,000 per year but the total outstanding on your car finance, including any balloon
payment is £52,000, then a lender would potentially not agree your loan as you would be more than 100 per cent of your gross annual income.
Of course, other unsecured borrowing, such as credit cards, personal loans and store cards are also reviewed as part of a remortgage, as well as other forms of committed expenditure, such as childcare costs, school fees or maintenance payments. This is why it does really pay to run through all of these elements with your mortgage adviser before you start to apply, so that they can review your finances holistically to help you understand what you may be able to borrow once an affordability calculation has been run by a lender.
Another thing to consider is that if you're applying for a remortgage to raise capital in order to fund a renovation project, some lenders will require evidence that you've actually had the work carried out. This means you may need to provide “before and after” photos of the work, together with receipts from suppliers and tradesmen.
The higher the amount you borrow, the more likely that the lender will want to see what you've done with the money.
But whether you're aiming to remortgage simply to lock into a low remortgage rate, or to raise capital, there are some things that you can do in advance to really help your chances of being able to access a great rate.
For example, six months before you apply for your remortgage, nurture your credit rating; either clear any credit cards, store cards or personal loans completely, or if you can't do that at least aim to pay as much down as possible. Ensuring that your credit file is up to date and accurate is key; you can easily check this by going online and registering for a free credit profile with Experian.
Also check to make sure that you're registered on the Electoral Roll and that you have a landline telephone number – both of which add points to your credit score.
Beyond that, when you apply you'll need to provide a minimum of the last three months' bank statements and pay slips, as well as your last P60 as proof of earnings.