OK, I am calling it, Spring is just around the corner. It may still be February and with the recent snow and gales not feel like it’s quite time to bust out the Hawaiian shirts, but I’ve counted the Sundays for us and in only 12 weeks it will be May! We can therefore all start looking forward to long summer nights, bbq’s and gin and tonics…
It is also time for round two of financially related blog posts from Hudson Rose HQ and this time we are going to stray away from the wonderous world of insurance. Don’t be too down, this post contains some pretty important info for you to unleash on the world and impress those who get a kick out of personal finance knowledge.
Buying or remortgaging property is a confusing enough process with lenders each having their own policy on how they assess an application. One of the key areas of obtaining a mortgage is affordability, if it ain’t affordable on paper they ain’t gonna lend you a dime (no idea why I wrote that last sentence in the style of bar tender from a New York speakeasy…!?!!)
But what is affordability and how does having children affect it?
Quite simply, affordability calculations are where a mortgage lender studies all your admissible income (basic pay, bonuses, income from self-employment etc) as well as your liabilities (credit cards, loans, store cards, hire purchase etc) and adds into the mix the costs they believe you will incur through daily living. This data tends to be based on Office for National Statistics figures but can simply be based on the lenders own data and experience.
After running this through their calculators, along with stress testing the mortgage amount against future interest rate rises, they come back with a decision to lend (or not) the amount you have applied for.
So where do our little bundles of joy fit in with all this?
Well, each lender will assume a ‘cost’ of having someone financially dependant on your income. This doesn’t have to be a child, it could be an elderly relative but for the purpose of this post we will assume we are talking about children. This assumed cost can vary from lender to lender but the upshot is that the more people dependant on the income, the lower the amount advanced will be (as there is less income left over each month to service the debt with more mouths to feed).
Now the fun bit is knowing which lenders are more generous than others. If we take an example of the following:
- A family of 4
- Joint parental income of £50,000 per annum
- No unsecured debts
- £600 per month childcare costs
- Wanting a mortgage over 25 years with a property value of £300,000
What are the real-world differences in loan amounts offered? The following are taken from high street lenders affordability calculators.*
Lender A – £243,000
Lender B – £176,600
A difference of £66,400 in loan amount based on exactly the same information!
Mental, isn’t it?!
But Graham, what can we do about this?!?!
Well, firstly it is important to look ahead if you are planning on having more children or starting a family. Do you need to move house? Or want to complete work to the property that will require a remortgage to finance it?
Do some groundwork initially to get a feel for how your capacity to borrow will be impacted by having more mouths to feed. It may be very little, it may be more than you expect but being armed with the right information is key.
Secondly, make sure you shop around for your mortgage- affordability is the tip of the iceberg as you also want to get a good rate of interest with little in the way of fees – the so-called mortgage holy grail (ok, it’s not called that at all, but I think it should be…)
Of course, we can help you with all of this and as we are ‘whole of market’ you know that we will leave no stone unturned. Shameless plug over.
Remember that it is important to make sure that the mortgage remains affordable even should your family grow. A good adviser will make sure that you are not heading for a fall further down the line and that any borrowing you take is affordable throughout the life of the mortgage. So don’t go nuts and borrow a ridiculous sum today knowing you will have a child and be broke next year. That is not a good plan.
Mortgage lenders will always ask if there are any changes to your future circumstances that might affect your ability to repay a mortgage – this includes future children. But so long as they won’t have such a devastating effect on your finances that you can’t pay the mortgage and bills, you are good to go.
There are several things that can affect mortgage affordability and having more mouths to feed is only one of them. Variable pay such as monthly bonuses or commission, for example, may be included at 100% (good for affordability) or 50% (bad) depending on which lender you are dealing with.
There is also another factor that may be applicable to families who have recently added to their flock or are expecting to shortly. Maternity Pay.
I shall be writing a future blog post covering this off but if this is something that you feel might affect you in the meantime, just reach out, get in touch and we can have a chat.
That’s all for now. Until next time.
Rave safe and take care.
*I can’t print the names of the lenders here but happy to provide them should you be curious. We have also had to assume some standard costs for food/travel etc but the same data was used for both lenders to ensure a fair comparison.
This blog is part of paid partnership CheltenhamMaman is proud to hold with Hudson Rose.
Graham is a father of two and a regulated provider of financial advice who believes you don’t have to wear a suit to know a thing or two about looking after your money and protecting those you love. You can find out more about Graham at Hudson Rose and follow him on Facebook and Instagram.
Graham is writing a series of blogs for CheltenhamMaman covering Money Matters and would love to know which myths you’d like busted! Leave a comment or drop him a message to let us know what topics you would find useful.