Tamsin speaks to Daniel Bell about mortgage affordability. How many years accounts do you need, what income will lenders take into account, how do they view loans and credit cards and are all lenders the same?
You can contact Tamsin at firstname.lastname@example.org or book an initial chat at https://calendly.com/tamsin-caine/15min.
You can contact Daniel at email@example.com.
(The transcript has been created by an AI, apologies for any mistakes)
Tamsin Caine 0:06
Hello, and welcome to the Smart Divorce podcast. I’m Tamsin Caine and I will be your host. In series three, we will be speaking to a number of experts and professionals in the divorce arena, and answering the questions that we get asked most often. If you’ve got a question and you don’t think we’ve answered it yet, please do get in touch, you can email me at Tamsin at smart divorce.co.uk. Now over to our guests.
Hi, I’m delighted to be joined today by Daniel bell of Bell financial solutions. How are you doing Daniel?
Daniel Bell 0:46
Very well, yourself?
Tamsin Caine 0:47
Yeah, I’m good. Thank you. We’re gonna talk today about mortgage affordability. And this is an ever changing subject I’ve found since I was involved in the mortgage world. And so let’s start off and consider the sorts of income that are taken into consideration. So there’s the obvious stuff, such as what you in from your job, but mortgage lenders sometimes will take other income into consideration as well. When did you want to run through what those sorts of things are?
Daniel Bell 1:24
Yeah, absolutely. So every lender takes into account different types of income. But I’m broadly most types of income can be taken into account by all sorts of lenders employed income, so income that you earned from your employer, and generally all of it will be taken into account but in different different ways in different ratios. For example, overtime commission bonuses, some lenders will take all of it into account, some lenders may only take say half of it into account.When it comes to things like benefits, tax credits, again, some lenders will take it into account, some lenders won’t, some lenders will take different tax credits into account and child benefit, Universal Credit working tax Child Tax.Some will take again 100% 60% 50%, it depends on the lender, and you’ve then got additional income such as maybe maintenance payments, formal arrangements, informal arrangements. And again, you know, it varies from lender to lender, whether they will or won’t take it into account. Lenders have criteria on how long they expect people to have been receiving an income before they do or don’t take it into account. I guess in short, you know, all all income can be considered. It just depends what lender it is. And, again, that’s where someone like myself comes into play. Because we look at, we look at all those different lenses and see, right based on the income that you’ve got coming in, you’re going to be best placed with that lender, because they will use most or all of your income, whereas that lender won’t use hardly any of your income, for example. So yeah, I guess in short, that’s where it comes into play.
Tamsin Caine 3:13
It’s about it’s about maximising the income that you’ve got coming in with the lenders so that you can potentially borrow, if you mean to the largest amount possible. So we’ve talked about employed income and bonuses and so on and overtime that may or may not be taken into consideration. And then the guests we’ve got self employed income and also those clients who in from through salary and dividends journey talk through how that might work.
Daniel Bell 3:48
Yeah, absolutely. I’m so self employed, I’m, again, varies from lender to lender. And you’ve, you’ve got different types of self employed people, obviously, you’ve got some traders, limited companies, partnerships. And as a rule of thumb, most lenders would expect people who have been trading for about two years and would look for an average of the last two years worth of income figures. If we were talking about a sole trader, for example, they’d be looking at the net profit figure. If we were talking about the limited company, they would usually be looking at the salary plus the dividends taken for the last two years. And again for a partnership the share of the net profit again for the last two years, there are however, different lenses that will take into account different figures, limited companies, for example, not you know, self self employed people work in different ways and that might not be a true reflection of what they are earning. And the there are lenders that will for example, take retained profits within the business and some lenders will take salary profit after tax, there are lenders that will take profit before tax, plus your salary. And there are lenders that will consider income after just one year trading, or work off projection. And so, you know, self employed people are more complex way of being assessed, but again, that, you know, the, the knowledge that we have as as mortgage brokers that that’s where we come into play really, really quite key key or self employed people, it’s again, looking at, right, how does your business or your self employed income work? And what therefore, what type of lender is best suited for you based on their risk appetite? You know, what do they look at? What figures do they look out? And therefore, all your income figures that we have? Which lender is going to be best? Because which one of them? Are they going to pick? based on the fact that that’s how they run their commercial risk? I’m, you know, it’s about, you know, much needs to the right lender accordingly.
Tamsin Caine 6:00
Yeah, absolutely. Okay. And then we look at expenditure, because there are some things that lenders will subtract from your income when they’re working out what at what your affordability is. And so shall we start off doing a talk through how loans are locked out?
Daniel Bell 6:21
Yeah. So loans, generally, lenders will look at the overall balances that you may have in relation to your income coming in, it’s what we call a debt to income ratio, and then the monthly payments that are going out. So there were, every lender has their own way of calculating it. There’s no simple calculation, but they will look at the monthly payments, and then use that as a deduction from the overall loan amount that they would then calculate based on the the income that you’ve got coming in. So as a very basic rule of thumb, lenders will look at all the income coming in, they will then say, have a calculation of what they would lend you. And then all the deductions that we’re going to mention, say now, they would then take off that final figure, so they can give you a maximum borrowing amount.
Tamsin Caine 7:18
Okay. And credit cards are from experience slightly different, I think I’m right, and same, because even if you say, Oh, I’m going to pay all my credit cards off, that doesn’t necessarily with all lenders cut the mustard doesn’t
No. So, again, your credit cards, I’m generally seen as slightly higher risk to a lender, there’s no fixed end date on a credit card, or open credit, and you can pay a credit card off, and then fill it right back up. Again, again, lenders would generally look at the overall balances that you have, and they would potentially look at how much of the credit you have in relation to your credit limits. But lenders again, would would then take a percentage of your balance, and use that as a deduction. So I’m free, percents a nice figure. But again, every every lender is different, and every lender has their own calculator. And usually, they’re, you know, that the way they calculate that in the background, we’re not privy to, and but again, you know, there are some lenders that, you know, if we, if you aren’t paying debt off as part of their settlement or divorce, then there are lenders that will, will discount all that, which is great. There are some lenders, as Thomson said, that will say, Nope, we still won’t take that into account, because we just have to consider that it is still out there. And then there are some lenders that go down the middle and say, right, well, we’ll take a proportion of that debt off the affordability, but we’re gonna leave a portion of it there just to sort of give us a little bit of comfort. So, again, that’s where, you know, myself would say, right, this is the type of lender we need to look at, because they’re going to, you know, consider the fact that we would be paying all that debt off or whatever accordingly.
Yeah, absolutely. And another thing that is going to be relevant for people getting divorced, and we’ve talked about maintenance, as a receipt of an income, but it’s also relevant if you’re paying maintenance as a parent, isn’t it?
Daniel Bell 9:22
Yeah, absolutely. So, I am maintenance going out as an expenditure is obviously a committed expense, and therefore would be treated very, very similar to a loan commitment. And so yeah, it’s, it is a factor and nearly all lenders would would take that into consideration. There are there are bit odd lender that wouldn’t. And again, if therefore, if that was, you know, a large amount as a proportion of your income, then that’s something we need to consider and therefore, you know, talk to the other lenders accordingly.
Tamsin Caine 9:56
Yeah, absolutely. And and another thing when We’re looking at affordability is the term of the mortgage. So if you’ve got an existing mortgage and you’ve been paying it off over 10 years, for example, that doesn’t necessarily mean that your new mortgage needs to be repaid over that sort of term does it?
No absolutely not, I mean, you should consider the fact that your existing mortgage was probably based on two incomes coming into the property and therefore, affordable, maybe every 10 years going forward, we should consider that it might just be the one income and circumstances that will be changing. And we’ve also got to look at retirement ages etc, you know, the existing mortgage was based on potentially, you know, a different retirement age based on the other party. But yes, you know, the term of the mortgage will have an effect on affordability. And if extending the term means we can get you into the property you want, because it means we can stretch that affordability, then, you know, that’s what we can look to do. But we’ll always go through those options and make sure it’s still the right thing for you. And we’re not putting you in a detrimental position. But, you know, absolutely the term is relevant. And it’s something that part of giving mortgage advice, if something will always look at make sure that we’re doing the right thing for you, by extending the term certainly can be a good option. If the advice is right. Yeah. And it’s not always that the mortgage has to finish at 65. There’s no, obviously not, not most mortgages, and most mortgage lenders would allow a mortgage to go up to age 70. If your stated retirement age was 70, which by the way, the way we go at the moment is quite normal. And a lender would would not be asking for any further evidence of retirement or pension income governments wage 70 if that was your state retirement age.
Daniel Bell 11:49
Okay. That’s it. That’s really good to know. And what about if you were older, as guests in your 60s, for example, is taken out a mortgage at that, at that age still possible?
Tamsin Caine 12:02
Yeah, absolutely. I, again, depending on the individual circumstances. And, you know, I did touch on when we were the income section, you know, there are things to consider, such as pensions. And, you know, as part of a divorce, you know, pensions are obviously looked at discussed, transferred. And then there’s, obviously do take pensions into account, mortgages can go into retirement, and it’s, you know, an area that, you know, we take more care on, but it can happen, and lenders will consider it and will consider, you know, retirement income. So, I’m Yes, mortgages can go on for a longer term, they can go right up to a date, in some cases, on a residential basis. But again, it’s all down to individual advice, and it’s something that we can look at.
Okay. And And what about the, the amount of borrowing that you take compared with the value of the property? So we would call that loan to value? Does that have any impact on the amount of borrowing that you can take? Yes, so the more equity in the property, I lower, the lower the loan to value, so the less you borrow in relation to the property value, and the more lender would generally lend. Because it’s, it’s less risk to the lender. For example, if you wanted to borrow 90% of the property value, a lender would be more cautious about the amount they would borrow that lend you Sorry, in relation to your income. Whereas if you only wanted to borrow 60% of the property value, a lender would be prepared to lend you more against your income. Because it’s less risk to that lender.
Fantastic. That’s brilliant. That’s been really helpful. Is there anything else that I should have asked you, on this subject of affordability?
Daniel Bell 13:59
I don’t think so. I think, again, I sort of said, but in short, it’s, it’s different for all lenders. And, and it changes, lenders change their affordability, you know, weekly, monthly, for different reasons for different risk appetites. And that’s why, you know, we’re here to obviously guide accordingly, you know, it’s not as simple as just four times income anymore, you know, take away a loan. There’s lots of different things to consider. And that’s why, you know, seeing an independent mortgage consultant like myself is, is the best way to make sure that you’re getting the right advice and the best affordability for yourself.
Tamsin Caine 14:40
Yeah, absolutely. It’s certainly a good idea to take some professional advice when it comes to mortgages and not just run to your nearest nearest High Street bank. And for anyone who does want to contact you will put your details in the show notes and then they can that they can get in touch and I know they’ll be getting great advice to do that. Thank you for joining me today Daniel!
Daniel Bell 15:02
thank you for your time.
Tamsin Caine 15:07
I hope you enjoyed today’s podcast. If you did, please do think about writing us a review or giving us a lovely five star rating on iTunes if that’s where you’re listening. hope you’ll join us again next time.
Transcribed by https://otter.ai