Leanne Macardle

Leanne Macardle

Editor
Published: 29/01/2019

At a glance

  • Make sure you have details of your income, including payslips and bank statements, before applying for a new mortgage.
  • Regular overtime and bonuses can be included in determining your total income.
  • Pension benefits, dividends and state benefits can also be included when determining your total income.
  • Freelancers may well experience a harder time getting a mortgage – seek professional help from a mortgage broker, if necessary.
  • Expect your outgoings to be examined closely by the provider – it is as much in your interest as it for them to ensure you can afford a mortgage.
  • Never be tempted to borrow more than you can comfortably repay.

An important part of any mortgage application is the affordability check - where the provider decides how much you can afford to borrow, and therefore what size mortgage you'll be offered. To get an accurate assessment, you'll want to know what counts as income, so you can declare everything you have to offer.

You can use our mortgage affordability calculator to see how your finances stack up.

Basic income

For most people, their salary will be their main or only source of income. So, your application could be straightforward. The longer you've been in your current job, the better it will look and the more you will likely be able to borrow, with the lender seeing you as a safer bet. When calculating your current pay, be sure to include overtime and bonus pay.

If you want any extra income from your job to count, you're going to have to show that this is something you get regularly, not just as a one-off. This means you'll likely have to show multiple payslips over a period to back up your claim. How much weight is given to the extra pay during the assessment will depend on the lender, so you may want to clarify this with them beforehand.

This is especially relevant for those who work on commission. They may have a low base salary that's supplemented by commissions, which could end up more than doubling it. Some lenders won't accept this extra income and look only at the basic pay, so beware.

If you have more than one job, don't forget to hand over payslips from all your employers. You may also need to clarify exactly how many hours you work for each job and how long you've been in each position, so the lender can determine the stability of the work. Note that third (or fourth) jobs generally don't get counted.

Freelance and self-employed income

An exception to this, in some ways, is freelance work, which could be seen as having many different jobs working for many different people. Ever since the financial crisis, mortgage providers have become stricter in terms of what they'll accept, which means freelancers and other self-employed workers may have a harder time getting a mortgage.

As such, they'll have to be extra prepared to show all earnings from the past two/three years. For this reason, it's generally advised that anyone considering becoming self-employed arranges their mortgage before they change their situation. Newly self-employed people will likely find it hard to get a mortgage or change their current mortgage deal.

This of course depends on the type of self-employment. While people who own a high-flying company will also be their own boss, and therefore technically self-employed, it's not the same situation as someone who's a sole trader with only a few repeat clients. Most mortgage providers will take this account. Directors may even be able to use their company's profits as proof of suitability, with 12 months of records enough for some lenders.

Whatever your specific situation, make sure your accounts are in order and ask the provider for advice before you start your application. Different providers will have different levels of experience when it comes to mortgage applications from freelancers; it's better to know how or even if they will be able to help you before you apply. So, if your income changes month-on-month, pick a provider based not just on the lowest rate but also on their ability to see your worth (it might even be worth speaking to a specialist broker or adviser for support).

Zero-hour contracts

Similarly, zero hours contracts can make it harder to find a mortgage. Some lenders will include income from zero-hour contracts, subject to seeing evidence of 12 months of payments. In some cases, lenders may decide to only use 50% of your income. When you are ready to apply for a mortgage, it is worth a call to your selected lender or lenders to establish their approach to zero hour contracts. Or, you can always speak to our preferred mortgage broker.

Other income

Besides your straightforward earnings, there are some other sources which can count as income for an application. These include pension income, investment dividends and Government benefits. If you have the paperwork to show that you are getting this income on a regular basis, most providers will likely be happy to include these funds in their assessment.

The situation is a bit more complicated when it comes to lodger or rental income. If you are planning to rent out a room in your property, to take advantage of the Government's Rent a Room scheme for instance, some providers may take this into account.

Similarly, if you're already a landlord of a different property, not all providers will accept rental income as additional income - some might even see the fact that you have a buy-to-let mortgage as a liability. Given that rental income is used to determine suitability for a buy-to-let mortgage in the first place, it makes sense that it wouldn't be counted twice.

Mortgage applications are now a lot tougher than before the financial crisis, which means that you will need to provide more information to prove that you can afford a loan. Depending on the provider, you will still be able to borrow around three to four times your overall income, after considering your deposit and outgoings as well.

Outgoings

The provider will go through your entire expenditure with a fine-tooth comb. You'll be expected to provide bank statements and will have to explain where your money's going, with everything from childcare costs to pension payments considered. This will be lined up against your income and used to determine affordability.

Joint applications

You may want to apply for a mortgage as a couple. While the exact same guidelines as outlined above for a single applicant will apply, different mortgage lenders will take the second applicant's income into account in different ways.

Some providers might multiply the main breadwinner's income and then add on the second applicant's income, the resulting figure being the amount they are willing to lend. Other providers might add the two incomes together and then apply a (potentially lower) multiple on the joint amount.

Remember that while a higher multiplication means you can borrow more, it also means you are more at risk if your situation changes and you can't afford the mortgage repayments anymore. Ultimately it will be the lender's decision regarding what they think you can afford to pay each month that will define what they will lend to you. They will always build in a margin to account for increases in interest rates so if things change you will still be able to afford the repayments. Always consider the risks as well as the potential rewards before deciding to sign on the dotted line with any mortgage provider.

Mortgage calculator

Our mortgage calculator helps you to see how much your mortgage might cost you each month.

Our how much can I borrow calculator gives you a range of how much a lender might consider lending you under a mortgage. This calculation is only an indication only.

Read our How much can I borrow for a mortgage guide to find out more about what can impact your potential sum of borrowing.

Moneyfacts tip

Moneyfacts tip Leanne Macardle

Before you apply for a mortgage, thoroughly review any regular expenses and decide if you definitely need them and try to pay off any debts such as loans and credit cards.

What next?

Once you know what you should be able to afford, look at our mortgage charts to see the best deals providers can currently offer.

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

stack of paper with question marks on table

At a glance

  • Make sure you have details of your income, including payslips and bank statements, before applying for a new mortgage.
  • Regular overtime and bonuses can be included in determining your total income.
  • Pension benefits, dividends and state benefits can also be included when determining your total income.
  • Freelancers may well experience a harder time getting a mortgage – seek professional help from a mortgage broker, if necessary.
  • Expect your outgoings to be examined closely by the provider – it is as much in your interest as it for them to ensure you can afford a mortgage.
  • Never be tempted to borrow more than you can comfortably repay.

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