Mortgage lending decisions follow a structured assessment covering several distinct areas. Understanding the components makes an application considerably more predictable.
This describes general practice. Mortgage decisions are individual and regulated, and advice should come from a qualified mortgage adviser.
Affordability rather than multiples
The shift that has defined lending practice.
Simple income multiples were historically the primary constraint. Regulatory reform in many jurisdictions moved lenders toward affordability assessment, examining income against actual committed expenditure.
Which means two applicants with identical incomes can be offered very different amounts, depending on their outgoings.
Income multiples generally still operate as a cap alongside the affordability calculation, so both constraints apply.
What counts as income
More specific than people expect.
Basic salary is straightforward. Variable income — bonus, commission, overtime — is typically included at a proportion, or averaged over a period, and lenders differ substantially in their treatment.
Self-employed income generally requires several years of accounts or tax returns, with the figure used varying between lenders.
Benefit income, pension income and rental income are treated according to individual lender policy.
Which means the same applicant can receive materially different offers from different lenders purely because of how income is treated, and this is where a broker's knowledge is most valuable.
What counts as commitment
The other side of the calculation.
Existing credit commitments — loans, cards, car finance, buy-now-pay-later arrangements — reduce affordability.
Childcare costs, which are substantial and are specifically assessed.
Dependants, which affect assumed essential expenditure.
And committed expenditure generally, assessed against statistical benchmarks or against actual bank statements depending on the lender.
Which is why lenders examine bank statements, and why regular discretionary spending patterns can affect an assessment.
Stress testing
A requirement in many regulatory regimes.
Lenders assess whether payments would remain affordable at a higher interest rate than the one being offered.
Which means the amount available is constrained by a rate you are not paying, and it is why affordability can appear conservative relative to current payments.
The specific stress rate and methodology are set by regulation and by lender policy, and both have varied over time.
The deposit and loan to value
Which determines pricing as much as availability.
Loan to value is the borrowing as a proportion of the property value.
Rates are generally tiered, with lower ratios attracting better rates, and the tiers are frequently at round percentage boundaries.
Which means a small additional deposit that crosses a boundary can produce a disproportionate improvement in rate, and this is worth calculating rather than assuming a smooth relationship.
The property itself
Assessed separately from the borrower.
A valuation is conducted for the lender's purposes, establishing that the property provides adequate security.
Certain construction types, tenures and features can restrict which lenders will lend, and this is a common and unexpected obstacle.
A lender's valuation is not a survey and does not assess condition for the buyer's benefit, which is a distinction that catches people out.
Preparing an application
What generally helps.
Checking credit files at all agencies and correcting errors, well in advance.
Reducing or clearing short-term credit commitments, since they reduce affordability directly.
Avoiding new credit applications in the months before.
Ensuring identity and address history is consistent and documented.
And gathering documentation early — payslips, accounts, statements — since the process stalls on missing paperwork more often than on assessment.
Agreements in principle
Worth understanding for what they are.
An initial indication based on information provided and generally a soft credit check.
It is useful for demonstrating seriousness to a seller and is not a commitment, and a full application can still be declined.
Which means treating it as an indication rather than an approval is the accurate reading.
Brokers and direct applications
Worth understanding since it affects both access and cost.
Some products are available only through intermediaries and some only directly, which means neither route sees the whole market.
Brokers may be paid by commission from the lender, by fee from the client, or both, and disclosure of this is generally required.
Whole-of-market and restricted panels are different propositions and the distinction should be stated.
For anything non-standard — variable income, unusual property, adverse credit history — a broker's knowledge of which lenders accommodate what is where the value concentrates.
Term and the total cost
A choice with a large effect that is frequently made by default.
A longer term reduces the monthly payment and increases the total interest paid, sometimes substantially.
Terms have lengthened in several markets as prices have risen relative to incomes, which improves affordability assessment and increases lifetime cost.
Overpayment facilities, where available without penalty, allow a long term to be repaid faster while retaining the lower committed payment as a safety margin.
Which is frequently a better structure than a short term with no flexibility, and it depends on the product terms.