How lenders really assess spending habits: What matters and what doesn’t

When our expert team of mortgage advisers guide our clients through the mortgage application process, some people worry about the level of scrutiny they are under, regarding their spending habits.

In this article, we look at what is and isn’t important, and we explain what lenders are looking for and why.

What does ‘affordability’ mean in a mortgage application? 

When lenders are considering your mortgage application, they need to be as sure as they can be that you are going to be able to consistently afford your monthly repayments.

In this context, ‘affordability’ is an assessment of how much you can borrow, based on your income and spending habits, without putting you in a vulnerable position financially.

Looking at your spending habits plays a key role in the lender working out how reliable you are likely to be in meeting your mortgage payments.

How do lenders calculate affordability? 

Most lenders subtract your regular financial commitments from your total income. 

They will look at all your regular spending like household bills and other regular commitments like running a car, any other existing debts and credit agreements.

Bear in mind that, as taking out a mortgage is a long-term commitment, your lender will be interested to know of any future significant costs you may need to budget for, like childcare.

What income counts towards affordability? 

Lenders will review your total earnings before tax (this is your gross income) and your take-home pay (your net income). 

They will also look at other income channels like commission, overtime and bonuses, but only if they are regular.

Court-ordered or long-term maintenance payments would also be included, as would pension income.

If you are self-employed, the lender will usually use your average profit over the last two or three years as a guide to your income.

Why do lenders care about your spending habits? 

Lenders are constantly assessing risk; when they are lending hundreds of thousands of pounds they need to do their best to ensure they are going to get their money back.

Assessing your spending habits and taking a holistic view of your income and expenditure gives them the best possible chance of ensuring that you won’t overstretch your budget. 

A lender will also want to be comfortable that you will have the capacity to maintain your mortgage repayments even if interest rates rise. 

How do lenders assess your spending habits? 

Generally, lenders will use several ways to assess your spending habits. They will review your credit report, and go through your bank statements – typically asking for your last three months of statements to give them a realistic picture of how you manage your money.

What spending patterns raise concerns with mortgage lenders? 

Seeing you regularly go into your overdraft, or often spending beyond your means, could concern your lender and make them wary of approving your mortgage application.

Missing payments on regular commitments like your utility bills, loans and credit cards is likely to raise a warning flag with them too.

If a mortgage lender sees activity like relying on payday loans, or regular spending on gambling, these types of transactions can raise red flags with lenders and potentially lead to your mortgage application being turned down.

This is because the lender sees this kind of spending behaviour as a sign that your finances may not be stable enough to give them the assurance that you will keep up with your monthly mortgage repayments.

How closely do mortgage lenders look at bank statements? 

Lenders look at bank statements very closely, as it’s a comprehensive and straightforward way to get a clear view of your day-to-day finances. As we mentioned earlier, they will generally ask to see three months of bank statements leading up to your mortgage application so that it’s a current view of your habits and lifestyle.

If you are a first-time buyer, it is likely that the lender will ask you to provide six months of bank statements as they will want to see that you are committed to providing a deposit as well.

Mortgage applicants may also be asked to provide statements for any savings accounts.

Self-employed mortgage applicants will probably be asked to provide business bank accounts statements as well as their tax returns from the past two or three years.

What looks bad on bank statements for a mortgage? 

To reiterate, missed monthly payments on utility bills, credit cards or other loans will not be looked upon favourably. Nor will short-term credit arrangements like payday loans, unless you can show that it was a specific one-off reason and not just to subsidise your everyday living costs.

Be aware that any large cash payments could be viewed suspiciously as potentially fraudulent activity. Therefore, if there are any such deposits on the bank statements you submit to your lender, you should provide an explanatory note about where the funds came from – it might be a gift from a family member to help towards your deposit, for example. 

How to improve your spending habits before applying for a mortgage 

There are several useful ways that you can make your financial situation look as healthy as possible before you apply for a mortgage.

1. Keep your bank account ‘tidy’ by demonstrating that you have a reliable and consistent income and steady spending habits.
2. Pay off as much of your existing debt as you can, like loans and credit cards, as lenders prefer to see you with as few other financial commitments as possible.
3. Show that you are disciplined with your money, by making regular deposits into a savings account.
4. Try to cut back on any extravagant spending like luxury purchases and indulging in habits like gambling.
5. Check your credit report and correct any weaknesses in it, like being linked to others’ bad credit.

Should I stop spending entirely before applying for a mortgage? 

No, it’s not realistic to stop spending all together, and lenders won’t expect you to. What they’re looking for is evidence that you manage your finances sensibly and reasonably and live within your means. After all, their objective is to reassure themselves that you will have the resources to pay your monthly mortgage repayments consistently.

Saying that, knowing that your lender will ask for your most recent three months of bank statements, it’s a good idea to make any big payments like holidays before that three month period if you can, as that would be an unusual spike in spending and not reflective of your day-to-day spending habits.

How PIL Southampton can help you 

Our team of friendly, experienced mortgage advisers won’t judge you on your spending habits! We’re here to guide you through the mortgage application process – we know what lenders are looking for and can help to maximise your chances of being successful in securing the right mortgage for you. 

How you can contact PIL Southampton

You can email us, fill out the contact form on our website or call us on 02380 668407. We look forward to hearing from you.