4 strategies to make you more attractive to mortgage lenders
When you apply for a mortgage, one of the items that the lender puts its magnifying glass over is your bank statements. They’ll scrutinise those papers for evidence of poor spending habits and bad financial management. A little work on getting your bank statement mortgage ready will pay huge dividends. Here, you’ll learn how to clean up your bank account so that your bank statements support your mortgage application.
Why do your bank statements matter?
Long ago, banks made their decision on whether to lend for a mortgage on the amount of money you earn. In the early 2000s, that calculation changed. Banks started to lend after assessing how much you could afford. The Bank of England (BoE) introduced rules for banks to follow when making this calculation. The BoE regularly updates these rules. In its latest revision of lending rules, the BoE put in place a tough mortgage ‘stress test’. The outcome is that you must prove you can afford to continue to pay your mortgage if interest rates rise by up to 3%. How does a lender check this? They often look at what you are currently spending, and see if there is any elasticity in your finances. They ask if you could make your income stretch further. The best place to get this information is from your bank statements. When your bank statements look good, you look good to a mortgage lender.
What does the lender examine on your bank statements?
The mortgage lender will usually ask for 3 months bank statements to examine evidence of income and expenses. On the income side, they will look for entries that include:
- Your earnings, bonuses, commissions, and overtime
- Income from investments
- Pension income
- Other income, such as child maintenance
- State benefits
On the expenses side, the lender will look for:
- Regular bills (such as utilities)
- Other loan payments
- Credit card payments
- Maintenance payments
They will also look for evidence of other spending. They will want to know how much you spend on entertainment, going out, clothes, childcare, etc. They gather all this information together, and then run it through their systems to figure out if you could afford:
- Current mortgage payments and future payments if interest rates were to increase
- Your mortgage payments if your circumstances change tomorrow (e.g. you have a baby, you take a career break, etc.)
A lender will want a ream of paperwork to back up your claims that you can afford the mortgage payments. They will want to see pay slips. They will want to see your business accounts if you’re self-employed. They will ask for P60s. The big piece of evidence is your bank statement. That’s where they will find details of what your finances are really like. They’ll unearth your spending habits. So, it pays to spend time and effort on making sure they tell the story they should.
4 ways to prepare your bank statements for a mortgage
You need to be cute to make your bank statements shine. You’ll need to consider how to cut some spending. There are several ways you can do this, without it harming your lifestyle. You will also need to be a savvier buyer and bank account user. Here are 4 strategies that have been proven to clean up bank statements.
1. Eliminate unnecessary direct debits
Examine your bank statements. Are there subscriptions coming out that you no longer want or need? Cancel them. You may have inadvertently signed up to a monthly membership deal when you bought something online. Take time to discover what that £10-per-month debit is, and if you don’t need it, cancel it. Are you paying a monthly fee for something you no longer use? I was once told that big companies like Vodafone make most of their profits from disused accounts, where the account holder hasn’t cancelled their direct debit. Are you one of those paying £10 or £20 every month for a mobile phone account you no longer use?
2. Switch energy suppliers and compare your insurances, too
Every year, you should review your energy bills. You could save hundreds of pounds each year by doing so. Similarly, don’t simply accept that your current insurance providers will renew at their best rate. They probably won’t. Take a few minutes to compare all your insurances against other quotes. You’ll be surprised at how much you could save. (A friend of mine did this, and his current car insurance provider cut his annual premium by more than £100.)
3. Use your credit card more – and clear the balance monthly
Use your credit card to pay for more. This has several benefits, including:
- The goods you purchase are insured
- Your spending habits are hidden (because you make a single payment each month from your bank account)
- You are building a credit history, and showing that you are responsible with credit
4. Cut your spending and increase your income
Many people spend money they don’t need to, by falling into bad spending habits. The savings that you could make might include:
- £1,200 per year by drinking instant coffee at work instead of sipping a daily Costa coffee.
- £1,200 per year when you take a packed lunch to work instead of buying a sandwich and snack from a supermarket.
- Up to thousands per year by wasting less food and buying more economically – plan your meals and buy cheaper brands. You really can eat well for less. Here’s a shopping tip: always take a list with you, and buy only what’s on the list.
Finally, think how you could increase your income. Yes, you could work longer hours. You could get a second job. But what about using your assets better? There are plenty of people making ‘free money’ by renting out their driveway as a commuter’s car parking space. And did you know that a spare bedroom could be worth as much as £7,500 per year to you – tax free? (See the ‘Rent-a-Room Scheme’ for more details.)
Making yourself an attractive proposition to mortgage lenders isn’t easy. Especially when they have so many affordability rules to work to. However, by a combination of clever spending, intelligent budgeting, and constant financial vigilance, you could get your bank statement mortgage ready. In summary:
- Review your bank statements
- Eliminate unnecessary direct debits
- Budget and spend more wisely
- Review and switch your major costs to cheaper options
- Put spending on your credit card – and pay the full balance every month
- Think of ways in which you might use your assets to increase your income
For more tips on how to make yourself most attractive to mortgage lenders, contact Mortgage Thoughts today.