Remortgage Affordability Calculator

How Remortgage Affordability Is Calculated

Since the Mortgage Market Review rules introduced by the Financial Conduct Authority in 2014, lenders must carry out a thorough affordability assessment for every mortgage application, including remortgages. This assessment goes beyond simply looking at your income and involves a detailed analysis of your entire financial position.

The affordability assessment typically involves two main components:

Income multiples. Lenders use income multiples to set an initial cap on how much you can borrow. The standard multiple is between 4 and 4.5 times your annual gross income. For example, if you earn 50,000 pounds per year, a lender using a 4.5 times multiple would consider lending you up to 225,000 pounds. Some lenders offer higher multiples of up to 5 or even 5.5 times income for higher earners or borrowers with particularly strong financial profiles.

Stress testing. In addition to the income multiple, lenders must stress test your ability to afford the mortgage at a higher interest rate. This is designed to ensure you could still make your payments if rates were to rise significantly. The stress test rate is typically the lender's standard variable rate plus a margin, or a minimum rate set by the lender, often around 6% to 7%. Your monthly payments at this stressed rate must be affordable after all your regular outgoings are taken into account.

The combination of these two assessments determines your maximum borrowing. In practice, the stress test often proves to be the more restrictive factor, particularly for borrowers with significant monthly commitments.

It is worth noting that the Bank of England removed its formal affordability test recommendation in 2022, giving lenders more flexibility in how they apply stress tests. However, most lenders continue to apply their own stress testing as part of responsible lending practices mandated by the FCA.

Affordability is not just about the maximum you can borrow. Even if a lender would offer you a certain amount, you should carefully consider whether the monthly payments are truly comfortable within your budget, leaving room for unexpected expenses and changes in circumstances.

What Income Do Lenders Consider?

The income that lenders take into account when assessing your remortgage affordability varies depending on your employment status and the types of income you receive. Understanding what counts and what does not can help you present your application in the strongest possible way.

Basic salary. Your gross annual salary before tax is the primary income figure for employed applicants. This is usually the most straightforward income to evidence, requiring recent payslips and potentially an employer reference.

Overtime and bonuses. Many lenders will consider regular overtime and bonus payments, but they may not use 100% of these amounts. Typically, lenders will use between 50% and 100% of your overtime and bonus income, depending on how regular and guaranteed it is. You will usually need to demonstrate at least twelve months of consistent additional earnings.

Commission income. If a significant part of your earnings comes from commission, lenders will usually average your commission payments over the last one to two years. Some may use the lower of the two years rather than the average. Commission-based earners should be prepared to provide detailed evidence of their earnings history.

Self-employed income. Self-employed applicants are typically assessed on their net profit or a combination of salary and dividends if operating through a limited company. Lenders usually require two to three years of accounts or SA302 tax calculations.

Benefits and tax credits. Some lenders will accept certain state benefits as income, including child benefit, working tax credits and universal credit. However, not all lenders accept benefits, and those that do may only use a portion of the amount. Disability benefits and carer's allowances are more widely accepted as they are not means-tested.

Rental and investment income. Additional income from property rentals or investments may be considered, though lenders often discount this income to account for its variable nature. The percentage used varies by lender and income type.

Second jobs. Income from a second job or side employment can be included if it is regular and evidenced through payslips and tax returns. Lenders typically want to see at least six to twelve months of income from a second job before including it.

If you have multiple income sources, it is particularly important to work with a broker who can find a lender whose criteria are most favourable for your specific combination of earnings.

Expenditure and Commitments That Affect Affordability

Your income is only one side of the affordability equation. Lenders also conduct a detailed assessment of your monthly outgoings and financial commitments to determine how much disposable income you have available for mortgage payments.

Existing credit commitments. All your current debts and credit agreements are taken into account, including:

• Credit card balances - Lenders typically use a percentage of your credit card limit, not just the current balance, when calculating your commitments
• Personal loans - Monthly loan repayments are deducted from your available income
• Car finance - PCP, HP or lease payments are treated as committed expenditure
• Student loans - Monthly student loan repayments are factored into the assessment
• Other mortgages - If you have additional mortgage commitments, these are included in full

Regular household expenditure. Lenders assess your regular living costs using a combination of declared expenses and statistical models based on the Office for National Statistics data. These costs include council tax, utilities, food, transport, childcare, insurance and other regular outgoings.

Dependants. The number of dependants you have, including children, affects your assessed expenditure. Each additional dependant increases the amount the lender assumes you spend on living costs, which reduces the income available for mortgage payments.

Future commitments. Lenders may also consider known future changes to your financial situation, such as an upcoming retirement, the end of a fixed-term employment contract or the start of school fee payments. Being transparent about these factors is important for an accurate assessment.

One important point to understand is that lenders look at your credit card limits rather than your current balances. If you have a credit card with a 10,000 pound limit but only use 500 pounds of it, the lender may still factor in a significant monthly payment against the full limit. Reducing your credit card limits before applying can therefore improve your affordability assessment.

It is also worth closing any credit accounts you no longer use, as even dormant accounts with available credit can affect your assessed commitments.

How to Improve Your Remortgage Affordability

If your initial affordability assessment suggests you cannot borrow as much as you need, there are several strategies you can employ to improve your position.

Pay down existing debts. Reducing or clearing credit card balances, personal loans and other debts before applying will directly improve your affordability. Focus on paying off the debts with the highest monthly payments first, as these have the greatest impact on your assessed commitments. Even paying down a credit card balance and reducing the credit limit can make a meaningful difference.

Close unused credit accounts. Credit cards and overdrafts that you no longer use still count against you in affordability calculations. Close any accounts you do not need and reduce credit limits on those you keep to the minimum you require.

Extend the mortgage term. Borrowing over a longer term reduces your monthly payments, which can help you pass the affordability stress test. For example, extending from a 20-year term to a 30-year term could reduce your monthly payments significantly. However, be aware that a longer term means you pay more interest overall and the mortgage takes longer to repay.

Increase your deposit or equity. A lower loan-to-value ratio not only gives you access to better interest rates but can also improve your affordability position. If you have savings you can put towards the remortgage, or if your property has increased in value since you last mortgaged it, you may benefit from a lower LTV.

Consider a joint application. Adding a second applicant, such as a spouse or partner, can increase the total income considered by the lender. Joint applications are assessed on combined income and combined expenditure, which can result in a higher borrowing capacity.

Review your spending. In the months leading up to your application, review your bank statements and reduce any unnecessary spending. Lenders may look at your spending patterns, and evidence of responsible financial management can work in your favour.

Choose the right lender. Different lenders have different affordability models, stress test rates and criteria for accepting various income types. A mortgage broker can compare affordability across multiple lenders and identify the one most likely to offer you the amount you need. The difference between lenders can be substantial.

Consider an offset mortgage. If you have significant savings, an offset mortgage allows you to use those savings to reduce the interest charged on your mortgage without actually paying off the capital. This can improve affordability by reducing the effective interest rate and the monthly payment amount.

Affordability for Different Remortgage Purposes

The purpose of your remortgage can affect how affordability is assessed, as different remortgage scenarios carry different risk profiles for lenders.

Like-for-like remortgage. If you are simply switching to a new deal without changing the amount you owe, the affordability assessment is usually the most straightforward. Some lenders apply lighter affordability criteria for like-for-like switches, particularly if you have been managing your existing mortgage payments without difficulty. This is sometimes referred to as a product transfer with your existing lender.

Remortgage to release equity. If you want to borrow more than your current outstanding balance, the affordability assessment will be based on the higher amount. Releasing equity increases your monthly payments and your overall debt, so lenders will apply their full affordability criteria. You will need to demonstrate that you can comfortably afford the higher payments even at the stressed interest rate.

Remortgage for debt consolidation. Consolidating other debts into your mortgage can actually improve your monthly affordability because the mortgage payment on the consolidated amount may be lower than the combined payments on your individual debts. However, lenders will assess the total new mortgage amount against their standard criteria and may ask about the nature of the debts being consolidated.

Remortgage with capital raising. If you are raising capital for home improvements, a business venture or another purpose, lenders will assess affordability on the total amount including the raised capital. Some lenders may also want to understand what the capital is being used for, as certain purposes carry higher risk.

Understanding which category your remortgage falls into will help you anticipate the level of scrutiny your application will receive and prepare accordingly. Your broker can advise on which lenders take the most favourable approach for your particular remortgage purpose.

It is also worth noting that if you are remortgaging with your existing lender through a product transfer, the affordability assessment may be simpler than switching to a new lender. Existing lenders already have your payment history and may be more lenient in their assessment, particularly if you have been a reliable borrower.

Understanding Stress Tests and Interest Rate Sensitivity

Stress testing is a critical component of the remortgage affordability assessment. It is designed to protect both you and the lender by ensuring that you could still afford your mortgage payments if interest rates were to rise significantly during the term of your mortgage.

How stress tests work. When you apply for a remortgage, the lender calculates what your monthly payments would be at a higher stress test rate rather than the actual rate you will pay. This stressed rate is typically several percentage points above the product rate and is set by each lender individually. If your income, after all expenditure and commitments are deducted, is sufficient to cover the payments at this stressed rate, you pass the affordability test.

Impact of the base rate. The Bank of England base rate influences both the actual mortgage rates available and the stress test rates applied by lenders. When the base rate is higher, actual mortgage rates tend to be higher, but the gap between the actual rate and the stress test rate may be narrower. Conversely, in a low rate environment, the stress test rate may seem disproportionately high compared to the actual rate you would pay.

Fixed rate considerations. If you are taking a fixed rate mortgage, the stress test is still applied because the lender needs to ensure you can afford the payments when the fixed period ends and you revert to a variable rate. Longer fixed rate periods can sometimes result in more favourable stress test treatment, as the period of rate certainty is longer.

Tracker and variable rate mortgages. If you choose a tracker or variable rate mortgage, the stress test may be more stringent because your payments could change at any time in response to base rate movements. Lenders need to be confident that you could handle significant rate increases.

The stress test effectively limits your maximum borrowing below what a simple income multiple calculation might suggest. For example, even if a 4.5 times income multiple would allow you to borrow 250,000 pounds, the stress test might limit you to 220,000 pounds because your monthly commitments at the stressed rate would be too high.

Understanding how stress tests work can help you plan your remortgage strategy. For instance, paying down other debts before applying reduces your monthly commitments and gives you more headroom in the stress test calculation. Your broker can run affordability calculations using different lenders' stress test rates to identify the best options for your circumstances.