Mortgages.scot

Another question from a visitor to the site, this time all about meeting affordability when applying for a mortgage, the question asked is noted below. As always, if you have any questions either drop me an email or register and open a chat with me. Whilst I cannot provide advice, I can certainly offer a general view.

Hi, we are applying for a mortgage in the next few months, should we cut back on spending so that when they review statements at the bank they don’t think we are spending too much and won’t give us the loan.

It is a good question and one that comes up a lot, in the guides section there are a number of articles covering affordability. One to focus on is around essential expenditure which addresses your specific question.

The question really comes down to whether the lender you apply to is using a model to test your expenditure or whether they carry out an actual review of the statements. There is a difference.

Modelled

If using a model then they won’t spend too much time reviewing your statements other than to establish if you have any regular commitments such as other loans, they class these are committed expenditure, or in other words, outgoings you must continue to pay after you get a mortgage.

Using a model a lender will use your net income and the number of adults/children to determine an amount of money you will be required each month to essentially live a no-frills existence.

Actual

Using actual expenditure the lender will go through your statements and base the amount required on your actual spending. Its a very subjective method of assessing expenditure, fewer and fewer lenders do this. Apart from the time taken to actually do this type of review, it is also somewhat unfair to assume the borrowers spending pre-mortgage will remain the same post-mortgage.

It is by no means unusual for example that a young couple with few financial commitments will spend on items such as clothes, entertainment and other items. Why? Because they can. Once they have a home, mortgage and all the costs that go with it, lifestyles change to adapt. So although someone spends on average £300 eating out in the months before getting a new home, that does not mean they will keep doing it.

The bottom line is that it’s a difficult one to judge when you do not know what a particular lenders view is. If you were to cut back on spending in the run-up to a new mortgage I would suggest you need to do it for at least 6 months prior, those lenders that still use this method of assessment are unlikely to look back any further than this.