Deciding when to switch your mortgage can be a challenging task. Although remortgaging can present a chance to reduce expenses and acquire additional funds, comprehending how lenders assess income is crucial in evaluating the feasibility of a remortgage.
In this article, we’ll clarify whether a remortgage is influenced by income and give an outline of the criteria that dictate whether you qualify for a remortgage. Additionally, we’ll discuss how lenders use your income to calculate your borrowing power.
What is remortgaging?
Remortgaging refers to the process of transferring your current mortgage to a different lender or product without changing your home’s ownership. By utilising the equity in your property as a deposit for the mortgage, you will remain in your current home.
One of the significant benefits of remortgaging is that it may lead to more competitive interest rates, lowering your monthly mortgage payments. Additionally, it could provide access to extra funds, enabling you to make home improvements or purchase a new vehicle.
If you choose to remortgage with a new lender, they will reassess your current mortgage agreement. They will consider the outstanding balance of your existing loan, the value of your home, and all associated income and expenses to establish a new mortgage that replaces and pays off your old one.
Your property
For most people their property won’t cause any issues when remortgaging. But there are a few things to be aware of before applying for a new mortgage and your broker will be able to help with these.
Construction type – You will be aware of this when you purchased the property. If your home is very unique, or made with non-standard construction, then the number of lenders available to you is reduced.
Ownership period – To have the widest choice of lenders you need to have owned your property for at least six months, this avoids the dreaded 6 month mortgage rule that some lenders adhere to. Otherwise you will need to find a day one mortgage.
Why do people remortgage?
Why do people remortgage, you ask?
Well, let me tell you:
- To score a better deal: By remortgaging, you can often grab lower interest rates and cut down your monthly payments. Who doesn’t love a good deal?
- To fund their dreams: Need cash for a home renovation or a shiny new car? Remortgaging can help you tap into the equity in your home and make those dreams a reality.
- To ditch the debt: Consolidating existing debts into a remortgage can help lower your monthly payments and save on interest rates. But tread carefully and don’t end up paying more in the long run.
- To find a new flame: Sometimes, the grass really is greener on the other side. Switching lenders can land you a sweeter deal with better terms, incentives, and fewer early repayment fees.
- To lock in long-term love: With a remortgage, you can secure a long-term deal that wasn’t available when you first got your loan. It’s like finding “the one” for your financial future.
Is remortgaging based on your income?
It’s easy to assume that if you’re borrowing the same amount, you won’t need to provide proof of your income. After all, you’ve been keeping up with payments for years, right?
While that may be true if you stick with your current lender (product transfer), any new lender will want to see that you have a steady income and can keep up with repayments.
In the UK, mortgages are regulated by the Financial Conduct Authority, and lenders are expected to calculate how much you can borrow based on your affordability. This is to ensure that you only borrow what is affordable and reasonable for your financial situation, protecting you as a homeowner.
How will lenders evaluate my income for a mortgage?
The answer depends on your employment status.
- For employees, lenders typically use recent payslips and P60s to determine your gross annual earnings, with overtime usually averaged.
- If you’re a self-employed sole trader, lenders will require full trading accounts validated by an accountant and may ask for SA302 year-end tax calculations from HMRC. Ideally you should be able to provide the last 2 years of accounts. Do lenders use the gross or net profit?
- For partnerships, lenders evaluate income using partnership trading accounts and your self-assessment returns/SA302.
- For limited company directors, lenders look at PAYE income, dividends, and company accounts/SA302s, and some may evaluate your income based on your share of company profits.
- Contractors may provide accounts, SA302s, or have their annual gross income calculated based on their current contract’s day rate. Subcontractors registered under HMRC’s Construction Industry Scheme may need to provide several months of CIS payslips, and lenders will consider the length of time they’ve worked with the same contractor or in a similar field. Learn how a CIS mortgage calculated.
What about low income earners?
It is still possible to remortgage on a low income. Nevertheless, certain lenders may have minimum income requirements, which can range from £10,000 to £20,000pa. Some lenders may also evaluate your entire financial situation and the size of the remortgage to determine affordability instead of setting a minimum income amount.
Having a good credit history and a low loan-to-value (LTV) percentage will enhance your chances of obtaining the best deal.
Can pension income be used?
Yes, there are a number of lenders that will accept pension income as a way of paying for a mortgage.
A lot will depend on your age and the types of pension that you have. If you’re over 55 it might be a good idea to investigate how an equity release plan would work.
CONTACT A REMORTGAGE EXPERT
If you wish to investigate your re-mortgage options we can put you in touch with a fully qualified whole of market mortgage broker.
How many times your income can you borrow?
As a general rule of thumb, lenders will allow you to borrow up to 4.5 times your annual income, although some may offer higher or lower multipliers depending on your situation. It’s worth noting that the amount you can borrow is also dependent on your monthly outgoings and expenses, as this will impact your ability to make repayments on the mortgage.
If your annual income is £50,000 and the lender offers a loan-to-income ratio of 4.5, you could potentially borrow up to £225,000 (£50,000 x 4.5).
If your annual income is £80,000 and the lender offers a loan-to-income ratio of 5, you could potentially borrow up to £400,000 (£80,000 x 5).
Joint mortgages
A joint mortgage is taken out by two or more people, typically couples. With a joint mortgage, all parties are equally responsible for the mortgage payments and are considered joint owners of the property.
When applying for a joint mortgage, lenders will look at the combined income, expenses, and credit scores of all applicants. This allows for a higher borrowing amount than an individual mortgage since the lender considers the income of all applicants.
There are lenders that offer 4.5 – 6 times your joint income.
| Combined income | 4 x | 4.5 x | 5 x | 5.5 x | 6 x |
|---|---|---|---|---|---|
| £40,000 | £160,000 | £180,000 | £200,000 | £220,000 | £240,000 |
| £50,000 | £200,000 | £225,000 | £250,000 | £275,000 | £300,000 |
| £60,000 | £240,000 | £270,000 | £300,000 | £330,000 | £360,000 |
| £75,000 | £300,000 | £337,500 | £375,000 | £412,500 | £450,000 |
| £90,000 | £360,000 | £405,000 | £450,000 | £495,000 | £540,000 |
What is affordability?
When you apply for a remortgage, the lender will assess your mortgage affordability by examining your income and expenses.
If you have significant monthly expenses, your borrowing amount may be reduced.
The debt-to-income (DTI) ratio is a critical aspect of the affordability assessment since it enables the lender to compare your earnings to your debt repayments. To calculate the DTI ratio, your gross monthly income is divided by your monthly debt repayments, which might include credit card payments, current account overdraft, student loan payments, car loan payments, personal loan payments, hire purchase, and interest-free credit.
If your DTI ratio is over 50%, you may be borrowing beyond your means. In addition to monthly debt payments, lenders will look at other routine expenditures when determining affordability, such as household bills, childcare costs, transportation costs, and gym memberships, as well as mobile phone contracts. Lenders will take all of this into account when determining your monthly affordability.
Lenders need to be certain that you can fulfil your monthly repayments in full and on time. As a result, it’s crucial to check with the lender what information they need before applying for a remortgage to be well-prepared.
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Deposits
Do you need a deposit to remortgage? A cash deposit is not normally needed when you remortgage.
It is most common when buying a house or moving house.
But there are a few situations when it will be needed, or it could be a wise decision.
To lower the LTV
If your remortgage LTV is hovering just above a lucrative ‘break point’, then it could pay to add in a cash deposit. You’ll then get access to better deals.
As a quick example: Your LTV works out at 76%. If you can afford to pay the 1% as a cash sum (to reduce your new mortgage), you can choose from the cheaper 75% LTV range of products.
Negative equity
You cannot remortgage if you have negative equity. This is when your mortgage balance is more than the value of your home.
If you have cash savings, one option would be to reduce your mortgage down to 90% loan to value.
You will then be able to remortgage and transfer to a more competitive deal.
Reduced income
This can be caused by affordability issues or your income dropping since you first took the mortgage out.
Sometimes you can’t qualify for the mortgage you already have, this means you cannot move to a new lender.
Should you have some savings it might be possible to use these to lower the mortgage debt and improve the affordability situation.
How do you remortgage?
If you’re considering remortgaging, you may want to (definitely) consider using a mortgage broker. A broker can help you navigate the process, access a wider range of lenders and products, and potentially secure a better deal.
To start, you’ll need to find a reputable mortgage broker (Hello!) who has experience in remortgaging.
They will ask you some questions about your current mortgage and financial situation, including your income, expenses, and credit history. Based on this information, they will be able to recommend suitable mortgage products that meet your needs and affordability.
Once you’ve decided on a product, the broker will guide you through the application process, helping you fill out the necessary paperwork and providing support throughout the entire process. They can also give you a list of documents needed when you remortgage. They will also communicate with the lender on your behalf, making sure everything is on track and that you’re getting the best deal possible.
You are probably wondering how long will all this take? Most remortgages take between 4-8 weeks from when you apply.
One of the biggest advantages of using a broker is that they have access to a wider range of lenders and products than you would have on your own. This means they can find mortgage deals that you may not have been able to access otherwise, potentially saving you money in the long run.
In addition, a mortgage broker can help you navigate any potential roadblocks during the application process, such as issues with credit history or affordability checks. They can offer expert advice on how to improve your chances of being approved, and help you find a suitable lender who is more likely to approve your application.
Our article How to get mortgage ready explains how getting organised ahead of time can improve your mortgage options and speed up the process.
So to wrap up. Yes, a remortgage is based on your income and if there are two people applying, the joint income is used. But lenders also look at your expenditure, from your bank statements, to see how affordable a new mortgage might be.
If you are unsure, then please speak with an independent mortgage broker.
