What do mortgage lenders look at? Income, debts, credit and the stress test

The short answer: lenders look at six things. Your income and how secure it is, your spending, your debts, your credit file, your deposit and the property. They also check you could cope if rates rose. The income multiple, usually 4 to 4.5 times salary, sets the most you can borrow. The other checks decide how far below that you end up. Debts usually make the biggest difference: £250 a month of car finance could cut what someone on £40,000 can borrow by around £33,750.

Here’s what each check involves, what lenders ask for, and what you can do about it in the months before you apply.

1. Your income

Lenders want to see what you earn and that it’s likely to continue. Expect to provide:

• Employed: your last three months’ payslips, your latest P60, and sometimes three months of bank statements showing your pay going in. A new job may need to be past its probation period, though many lenders will accept a signed contract.
• Self-employed or company director: two or three years of tax calculations (SA302s) and tax year overviews from HMRC, or company accounts. Lenders usually average your profit or salary and dividends.
• Variable pay: overtime, bonus, commission and shift allowances often count at 50% to 100% if you can show they’re regular.
• Other income: some benefits, maintenance, rental income and pensions can count, depending on the lender.

2. Your spending

The affordability check works out how much of your income is free once your committed spending is paid. Lenders use your figures, your bank statements and official averages for things like food and bills, often taking whichever is higher. Items that weigh heavily:

• childcare and school fees;
• the number of people who depend on you;
• travel to work, maintenance payments and other regular commitments;
• regular spending that worries underwriters, such as frequent gambling, payday loans or going into an unarranged overdraft.

Three tidy months of bank statements before you apply helps more than people expect.

3. Your debts

There’s no rule like “no more than £X of debt”. Lenders treat each monthly repayment as money you can’t put towards a mortgage, and lend less to match. Credit card balances are often counted as a monthly cost of around 3% to 5% of the balance, even if you clear them in full. Buy now pay later plans are increasingly counted too.

This uses the same rough adjustment as our calculator. Each lender’s model is different, but the scale is right: every £100 a month of repayments costs roughly £13,000 to £14,000 of borrowing. That’s why clearing a small loan or card before applying can be worth more than saving the same money towards a deposit. If you’re weighing up a new car, see how much car you can afford before you sign.

Student loans aren’t treated as debt, but the repayment comes out of your pay before you get it, so it lowers the income lenders see.

4. Your credit file

Lenders check one or more of the three credit reference agencies, Experian, Equifax and TransUnion. They look for:

• Missed or late payments, especially in the last 12 to 24 months;
• Defaults, CCJs, debt management plans or IVAs, which stay on your file for six years;
• How much of your credit limits you use. High balances on cards look riskier than the same limits barely used;
• Lots of recent applications, which can suggest money pressure;
• Being on the electoral roll at your address, which helps lenders confirm who you are.

Bad credit doesn’t always mean no. A settled default from five years ago counts far less than missed payments last year. Specialist lenders accept more, usually at a higher rate or with a bigger deposit. Check all three files for free before you apply and get any mistakes corrected.

5. Your deposit

Most lenders need at least 5% of the price. A bigger deposit puts you in a lower loan to value band, which means lower rates. It also counts in your favour in borderline cases, because the lender has more of a cushion. Lenders will want to see where the money came from, such as savings statements or a gifted deposit letter from a relative confirming it isn’t a loan.

6. The property

The lender values the home to make sure it’s worth what you’re paying. Some properties are harder to mortgage: flats above shops, non-standard construction, homes with short leases (many lenders want 80 to 85 years or more left), and flats in buildings with cladding problems. If the valuation comes in low, the lender lends against the lower figure and you make up the difference.

The stress test

Under the FCA’s responsible lending rules, lenders must check you could still afford the mortgage if interest rates rose over at least the first five years. The Bank of England’s fixed rule, testing at 3 percentage points above the lender’s variable rate, was withdrawn in August 2022. Each lender now sets its own stress rate.

One detail is worth knowing. The FCA rule on future rate rises doesn’t apply when your rate is fixed for five years or more. That’s why some lenders let you borrow a little more on a five-year fix than on a two-year fix. If you’re just short of the figure you need, ask a broker whether a longer fix would help.

Before you apply: a checklist

1. Check your credit files with all three agencies and fix errors.
2. Register on the electoral roll.
3. Pay down card balances and avoid new credit for three to six months.
4. Keep your bank statements tidy for the last three months.
5. Gather payslips, P60s or tax calculations, and proof of your deposit.
6. Get a mortgage in principle, ideally with a soft search, before you make offers.
7. Talk to a broker if you’re self-employed, have past credit problems or need a higher multiple.

Next step

Put your income, debts and deposit into the mortgage affordability calculator to see your rough limit. For the full table by salary, read how much mortgage you can get on your salary.

This is general information, not mortgage advice. Every lender sets its own criteria.