When applying for a mortgage, many prospective borrowers focus on their credit score and income, but one often overlooked aspect is spending habits. Mortgage lenders take a comprehensive view of an applicant’s financial behaviour to assess their ability to manage mortgage repayments. Understanding how your spending habits impact your mortgage application can help you better prepare and improve your chances of approval.
1. Why Do Lenders Look at Spending Habits?
Lenders need to ensure that borrowers can afford their mortgage repayments without undue financial strain. By examining spending habits, lenders can:
- Assess Affordability: Lenders want to ensure you can afford the monthly mortgage payments in addition to your other regular expenses.
- Evaluate Financial Stability: Consistent and responsible spending habits indicate financial stability, which reassures lenders that you’re a low-risk borrower.
- Identify Potential Risks: Irregular or excessive spending can signal potential financial difficulties, increasing the risk for lenders.
2. What Spending Habits Do Lenders Examine?
When reviewing your spending habits, lenders look at various aspects of your financial behavior:
Regular Monthly Expenses:
- Living Costs: Essential expenses such as rent, utilities, groceries, and transportation are scrutinized to determine your monthly outgoings.
- Debt Repayments: Existing loan or credit card repayments are considered to assess your overall debt burden.
Discretionary Spending:
- Lifestyle Choices: Non-essential spending on dining out, entertainment, holidays, gambling and luxury items can impact your affordability assessment.
- Subscriptions and Memberships: Regular payments for gym memberships, streaming services, or other subscriptions are also taken into account.
Financial Commitments:
- Credit Commitments: Loan, credit card, hire purchase and student loan payments are taken into account.
- Childcare Costs: If you have children, childcare expenses are factored in.
- Support Payments: Spousal or child maintenance payments are included in your financial obligations.
3. How Lenders Review Spending Habits
Lenders typically analyze your spending habits through several means:
Bank Statements:
- Lenders often request three to six months of bank statements to get a detailed view of your income and expenditure. This allows them to see how you manage your finances on a month-to-month basis.
Credit Reports:
- Your credit report provides insight into your borrowing and repayment history. It shows how much credit you have available and how you use it, reflecting your overall financial health.
Budgeting and Affordability Calculations:
- Lenders use affordability calculators to determine if you can comfortably manage mortgage payments along with your other financial commitments. They compare your income against your regular outgoings to ensure there is enough surplus to cover the mortgage.
4. Improving Your Spending Habits Before Applying
If you’re planning to apply for a mortgage, improving your spending habits can enhance your application:
Create a Budget:
- Establish a realistic budget that covers all your expenses and stick to it. This demonstrates financial discipline and ensures you have enough disposable income for mortgage repayments.
Reduce Non-Essential Spending:
- Cut back on discretionary spending in the months leading up to your application. Avoid large, unnecessary purchases that can deplete your savings and increase your outgoings.
Pay Down Existing Debts:
- Reducing your existing debt load can improve your affordability assessment. Focus on paying off high-interest debts and maintaining low credit card balances.
Build Savings:
- Having a robust savings account not only provides a safety net but also shows lenders that you are financially responsible. Aim to save a consistent amount each month.
Avoid New Debt:
- Refrain from taking on new loans or credit cards before applying for a mortgage. New debt can affect your debt-to-income ratio and raise red flags for lenders.
5. Common Pitfalls to Avoid
To present the best possible picture to lenders, avoid these common pitfalls:
Overdraft Usage:
- Regularly using your overdraft can indicate poor financial management. Aim to stay within your available funds.
Missed Payments:
- Missing payments on bills or existing loans can severely impact your credit score and lender’s perception of your reliability.
Large, Unexplained Transactions:
- Significant, unexplained transactions can cause concern for lenders. If you do make large purchases, ensure they are justifiable and not impulsive.
Conclusion
Yes, mortgage lenders do look at spending habits as part of their assessment process. By understanding what lenders are looking for and improving your spending habits accordingly, you can enhance your mortgage application and increase your chances of securing a favourable deal. Being mindful of your financial behavior, creating a budget, reducing non-essential spending, and maintaining a strong savings habit are all steps in the right direction. Preparing well in advance and presenting a stable financial picture will help you navigate the mortgage process more smoothly and achieve your homeownership goals.
A mortgage adviser can provide you with tailored advice and support to find the best lender and mortgage product for your financial situation.
