Remortgage Affordability

What Is a Remortgage Affordability Assessment?

A remortgage affordability assessment is the process lenders use to determine whether you can comfortably afford the mortgage payments you are applying for. It goes well beyond simply checking your income — lenders carry out a detailed analysis of your entire financial position.

The assessment is a regulatory requirement. Following recommendations from the Financial Conduct Authority (FCA), all regulated mortgage lenders must carry out a thorough affordability check before approving a mortgage. This applies to remortgages as well as new purchases, though some product transfers with existing lenders may have lighter requirements.

The affordability assessment typically covers four main areas:

• Income verification — Confirming your income from all sources and determining how much of it the lender will include in their calculations.
• Expenditure analysis — Assessing your committed monthly outgoings, including debts, bills, and essential living costs.
• Disposable income calculation — Working out how much money you have left each month after all commitments, and whether this is sufficient to cover the proposed mortgage payments.
• Stress testing — Checking whether you could still afford the mortgage if interest rates increased by a specified amount above the rate you are applying for.

Each lender has their own affordability model, which means the same applicant can receive different borrowing limits from different lenders. This is one of the key reasons why working with a mortgage broker can be beneficial — they understand which lenders' models are most favourable for different types of applicants.

How Lenders Verify and Assess Your Income

Your income is the starting point for any affordability assessment. Lenders need to verify not just how much you earn, but how reliable and sustainable that income is. Here is how different types of income are typically treated:

Employed income (PAYE):

• Your basic salary is taken at face value, supported by payslips and potentially an employer reference.
• Guaranteed allowances (such as shift allowances or London weighting) are usually included at 100%.
• Overtime, bonuses, and commission are often included but at a reduced rate — typically 50% to 75% of the average over the last 12 to 24 months.
• Some lenders require bonuses to be evidenced over two or three years to demonstrate consistency.

Self-employed income:

• Lenders typically require two to three years of accounts or SA302 tax returns from HMRC.
• For sole traders, net profit is used as income. For limited company directors, salary plus dividends are assessed.
• Some lenders use the average of the last two or three years' income, while others use the most recent year's figure. This can make a significant difference if your income has been increasing.
• Retained profits within a limited company may also be considered by some lenders.

Other income sources:

• Rental income — If you own other properties, rental income may be included, typically at 75% to 80% of the gross rent.
• Benefits and tax credits — Some benefits, such as child benefit and working tax credits, are accepted by certain lenders. Others exclude them entirely.
• Pension income — Pension income is accepted for older borrowers, supported by pension statements or P60 forms.
• Investment income — Dividends from investments may be considered if evidenced consistently over time.

The key point is that not all income is treated equally. Understanding how lenders view your specific income profile helps you target the right lenders and set realistic expectations about your borrowing capacity.

How Lenders Assess Your Monthly Outgoings

The expenditure side of the affordability assessment is just as important as the income side. Lenders want to understand your full financial picture, not just how much you earn.

Committed expenditure:

Lenders identify all your regular financial commitments that you are contractually obliged to pay. These include:

• Credit card minimum payments (based on your outstanding balance, not your credit limit)
• Personal loan repayments
• Car finance or hire purchase agreements
• Student loan repayments
• Child maintenance or spousal maintenance payments
• Ground rent and service charges (for leasehold properties)
• Insurance premiums (buildings, contents, life, etc.)

Essential living costs:

Lenders also estimate your essential living costs, even if you do not provide exact figures. These estimates are based on statistical data and the Office for National Statistics (ONS) expenditure benchmarks, adjusted for your household size. They include:

• Council tax
• Utilities (gas, electricity, water)
• Food and household essentials
• Transport costs
• Clothing
• Communications (phone, broadband)
• Childcare costs

Some lenders use the figures you declare on your application, while others use their own benchmarks — whichever is higher. This means that even if you spend very little on certain categories, the lender may apply a minimum figure based on national averages.

Discretionary spending:

Some lenders also factor in discretionary spending such as gym memberships, subscriptions, or regular entertainment expenses. The level of detail varies between lenders, but the trend is towards more thorough expenditure analysis.

The sum of all these outgoings is subtracted from your net income to determine your disposable income — the amount available to cover your mortgage payments.

The Stress Test: Planning for Interest Rate Rises

One of the most important elements of the affordability assessment is the stress test. This checks whether you could still afford your mortgage payments if interest rates were to increase significantly.

The stress test works as follows:

• The lender takes the interest rate you are applying for (for example, 4.5%)
• They add a buffer, typically 1% to 3%, to simulate a rate increase (bringing the test rate to 5.5% to 7.5% in this example)
• They calculate what your monthly payments would be at this higher rate
• They check whether you could still afford these higher payments based on your income and outgoings

The stress test exists to protect borrowers from overextending themselves. Even if you can comfortably afford payments at today's rate, a future rate increase could push your payments to an unmanageable level. The stress test ensures there is a financial buffer built in.

The size of the stress test buffer varies between lenders. Some apply a fixed buffer (for example, 2% above the product rate), while others use a minimum stress rate regardless of the product rate. Following changes to the FCA's regulatory framework, some lenders have adjusted their stress testing approach, but all continue to test affordability at a rate above the one you are applying for.

The stress test can be particularly challenging for:

• Borrowers on tight budgets — If your disposable income is already stretched, the higher stress test payments may fail the assessment.
• Interest-only borrowers — Some lenders stress test interest-only mortgages more strictly, as the payments can increase more dramatically with rate rises.
• Borrowers near maximum LTV — Higher LTV mortgages carry higher rates, which means higher stress test rates and tougher affordability hurdles.

If you are close to the affordability limit, small changes can make a significant difference. Extending your mortgage term, paying off a credit card, or even reducing a regular subscription can improve the figures just enough to pass the stress test.

What to Do if You Fail the Affordability Assessment

If your remortgage application fails on affordability grounds, it does not necessarily mean you cannot remortgage at all. Here are practical steps you can take:

Reduce your debts:

Paying off or paying down credit cards, loans, or car finance before applying can make a meaningful difference to your affordability. Even small reductions in monthly commitments free up disposable income that improves your assessment.

Try a different lender:

Because each lender has their own affordability model, failing with one does not mean you will fail with all. A mortgage broker can identify lenders whose criteria are better suited to your circumstances. Some lenders are more generous with bonus income, more flexible with self-employed applicants, or apply lower stress test buffers.

Extend your mortgage term:

A longer mortgage term reduces your monthly payments, which improves affordability. However, this means paying more interest over the life of the mortgage. Consider whether this trade-off makes sense for your situation.

Borrow less:

If you were planning to release equity, consider reducing the amount you want to borrow. This lowers the monthly payments and improves your chances of passing the affordability assessment.

Consider a product transfer:

Your existing lender may apply lighter affordability checks for a product transfer, especially if you are not borrowing additional funds. This can be a practical route if a new lender's full assessment is proving problematic.

Wait and improve your position:

If you have recently changed jobs, taken on new debt, or had a change in circumstances, waiting a few months for your situation to stabilise can improve your affordability profile. A pay rise, the end of a loan, or passing a probationary period can all make a difference.

Whatever the outcome, avoid submitting multiple applications to different lenders in quick succession. Each application involves a hard credit check, which can lower your credit score and make subsequent applications even harder. Work with a broker to identify the right lender before applying.

Affordability for Product Transfers vs New Lender Applications

There is an important distinction between the affordability checks applied to product transfers and those applied to full remortgage applications with a new lender.

Product transfers (staying with your current lender):

• If you are simply switching to a new rate with the same mortgage balance, many lenders carry out a reduced affordability assessment or no affordability check at all.
• This is because you are already an existing customer with a proven payment track record. The lender is not taking on new risk.
• If you want to borrow additional funds, the lender will typically carry out a full affordability assessment for the extra amount, even if the product transfer itself does not require one.
• Product transfers can be a lifeline for homeowners whose circumstances have changed (such as reduced income or increased debts) and who might struggle to pass a new lender's full affordability assessment.

New lender applications:

• A new lender will always carry out a full affordability assessment, including income verification, expenditure analysis, and stress testing.
• They treat you as a new applicant, regardless of your existing mortgage payment history.
• This means you could be in the unusual position of being able to afford your current payments but failing a new lender's affordability test — particularly if interest rates have risen or your circumstances have changed since you took out your original mortgage.

This distinction is crucial. If you are concerned about affordability, explore your existing lender's product transfer options first. They may offer a competitive rate without the full underwriting scrutiny that a new lender would require.

That said, do not assume a product transfer is always the best option. If you can pass a new lender's affordability assessment, you have access to the whole market and may find a significantly better deal. A mortgage broker can help you weigh up both routes and determine which one delivers the best outcome for your circumstances.