What lenders look at for a mortgage

Mortgage lending decisions are made on affordability and credit history together, and the affordability side is where most applications are constrained.

The affordability assessment

What lenders examine.

Income, verified through payslips, tax documents or accounts, with different treatment for basic salary, overtime, bonus, commission and self-employed profits.

Existing credit commitments, including loans, cards, car finance and buy-now-pay-later arrangements.

Committed expenditure: childcare, maintenance payments, subscriptions and regular outgoings.

Household composition and dependants.

And a stress test against higher interest rates, since lenders must assess whether payments remain affordable if rates rise.

Which means the amount available is frequently lower than a simple income multiple suggests.

What reduces the amount available

Frequently surprising.

Existing debt, where each monthly commitment reduces borrowing capacity by a multiple of itself.

Which means clearing a car finance agreement before applying can increase the mortgage available by substantially more than the balance cleared.

Buy-now-pay-later arrangements, which increasingly appear on credit files and are assessed.

Childcare costs.

An overdraft used regularly.

Gambling transactions on statements, which lenders scrutinise and which have caused declines.

Recent large unexplained transactions.

And a short employment history in a new role or self-employment, where lenders generally want a track record.

The statements

Which are read more carefully than people expect.

Lenders typically review several months of bank statements.

What they look for: regular income matching what is declared; commitments not declared; gambling; returned direct debits and unarranged overdraft use; large transfers with no explanation; and payday or high-cost lending.

Which means the months before applying matter, and behaving conservatively during that period is worthwhile.

Anything unusual should be explainable, and a written explanation with evidence handles most cases.

Self-employed applicants

Where the requirements differ.

Lenders generally want two or three years of accounts or tax documents.

They typically assess net profit rather than turnover, and for company directors the treatment of salary, dividends and retained profit varies substantially between lenders.

A declining trend in profits is treated cautiously.

Aggressive expense claiming reduces declared profit and therefore borrowing capacity, which is a genuine trade-off between tax efficiency and mortgage eligibility.

And a broker is particularly valuable here, since lender criteria differ enormously and the right lender makes the difference between approval and refusal.

Preparing a year ahead

What to do.

Check all your credit files and correct errors.

Register on the electoral roll where this applies.

Clear or reduce existing credit commitments.

Avoid new credit applications in the months before applying.

Keep utilisation low.

Ensure all payments are on time.

Build the deposit and keep it in a traceable account.

Assemble documents: identification, proof of address, payslips, tax documents, accounts, bank statements and proof of deposit source.

And obtain a mortgage in principle, which reveals the actual constraint.

The deposit source

Which lenders verify.

Anti-money-laundering rules require the source of the deposit to be evidenced.

Savings accumulated over time are straightforward.

Gifts require a letter confirming the money is a gift with no repayment expected and no interest in the property, plus identification and evidence of the giver's funds.

Loans from family are treated as commitments and affect affordability.

Sudden large deposits with no explanation cause delays and refusals.

And funds from abroad frequently require additional evidence.

Rate types and what they mean

Briefly.

Fixed rate, which provides certainty for a period and generally carries early repayment charges.

Variable, tracker and discounted rates, which move with market or lender rates.

The choice depends on your tolerance for payment variation and on the rate environment, and there is no universally correct answer.

What matters practically: understanding what happens at the end of any deal period, since reverting to a standard variable rate is generally expensive, and diarising the date to arrange the next deal.

Brokers

Frequently worth using.

They know which lenders accept which circumstances, which is where most of the value is.

Some charge fees and some are paid by the lender, and this should be disclosed.

Whole-of-market brokers see more products than tied ones.

And for anyone self-employed, with irregular income, with adverse credit or with anything unusual, a broker generally saves more than they cost.

General information only, not financial advice. Lending rules vary enormously by country — consult a regulated mortgage adviser.