How affordability assessments work
When you apply for a debt consolidation remortgage, the lender must satisfy themselves that you can afford the new, higher mortgage payment. This is not a simple income multiple calculation. Since the Mortgage Market Review in 2014, lenders are required to conduct a detailed assessment of your income and expenditure to determine whether the mortgage is affordable both now and in the future.
The affordability assessment considers your gross income from all sources, your existing financial commitments that will remain after consolidation, your essential living costs including council tax, utilities, food, transport, and childcare, and discretionary spending. The lender builds a detailed picture of your monthly budget and determines whether sufficient surplus income exists to comfortably cover the new mortgage payment.
Stress testing explained
Beyond the current affordability calculation, lenders stress-test your ability to pay at a higher interest rate. This ensures you could still afford the mortgage if rates increased. The stress-test rate varies by lender and deal type but is typically the lender's standard variable rate plus a margin, or a fixed floor rate, whichever is higher.
For example, if the actual mortgage rate is 5.2%, the stress-test might be conducted at 7.5% or 8%. If your monthly payment at the stress-test rate would leave insufficient surplus income after expenses, the lender will decline the application even though the payment at the actual rate is affordable.
This stress testing is particularly relevant for debt consolidation because the mortgage amount is higher than a standard remortgage. The larger the debt being consolidated, the higher the mortgage and therefore the higher the stress-tested payment.
The debt consolidation paradox
There is an inherent tension in debt consolidation affordability assessments. You are applying to consolidate because your current debt payments are straining your finances. But the lender is assessing whether you can afford a larger mortgage. In some cases, borrowers find themselves unable to pass the affordability assessment for the consolidation mortgage even though they are struggling with the affordability of their existing debts.
This paradox arises because the debts being consolidated are factored into the affordability calculation differently depending on the lender. Some lenders exclude the debts being consolidated from the affordability calculation, on the basis that they will be cleared by the mortgage advance. Others include them until the debts are actually repaid, creating a double-counting problem during the assessment.
A specialist broker understands which lenders treat debt consolidation affordability most favourably and will direct your application accordingly.
What income counts?
Lenders accept various forms of income when assessing affordability for a debt consolidation mortgage.
- Employment income: Basic salary plus regular overtime, bonuses, and commission. Some lenders take 100% of basic and a percentage of variable income (often 50% to 75%).
- Self-employment income: Typically based on your last two to three years of self-assessment tax returns or company accounts. Lenders usually use the average or the lower of the two most recent years. Net profit for sole traders and salary plus dividends for limited company directors.
- Benefits income: Child benefit, child tax credits, working tax credits, and disability benefits are accepted by most lenders. Universal Credit is accepted by some lenders but not all. State pension and private pension income are widely accepted.
- Rental income: If you receive rental income from other properties, this may be included, typically at a reduced percentage.
- Other income: Maintenance payments, investment income, and trust income may be considered by some lenders with appropriate evidence.
What reduces your affordability?
Several factors can reduce the amount a lender is willing to offer for debt consolidation.
Remaining commitments
Any financial commitments that will not be cleared by the consolidation reduce your available income for the mortgage. These include car finance, student loan repayments, child maintenance payments, hire purchase agreements, and any debts not included in the consolidation.
Dependants
The number of financial dependants in your household affects the expenditure side of the calculation. More children or dependants means higher assumed living costs, which reduces the surplus available for mortgage payments.
Living costs
Lenders use a combination of declared expenditure and statistical models to estimate your living costs. These have increased in recent years, reflecting higher costs for essentials. Even if your declared costs are low, lenders apply minimum floors to ensure the assessment is realistic.
The stress-test rate
A higher stress-test rate reduces maximum borrowing. Lenders with lower stress-test rates can sometimes approve cases that others would decline. This is another area where a broker's knowledge of individual lender criteria is invaluable.
How to improve your affordability
If you are concerned about passing the affordability assessment, several strategies can help.
Clear smaller debts before applying
If you can pay off any smaller debts before the application, this removes them from the expenditure side of the calculation and increases your surplus income. Clearing a £150 per month car finance payment, for example, could increase your borrowing capacity by several thousand pounds.
Extend the mortgage term
A longer mortgage term reduces the monthly payment, which can help pass the affordability assessment. Moving from a 20-year term to a 25-year term reduces payments significantly. However, this also increases the total interest paid over the life of the mortgage, so it should be considered carefully.
Include all income sources
Ensure every legitimate income source is included in the application. Benefits income, rental income, and regular overtime or bonuses can all contribute to the affordability calculation. A broker will identify which income sources each lender accepts and ensure everything relevant is included.
Choose the right lender
Different lenders use different affordability models, stress-test rates, and income multiples. A case that fails affordability with one lender may pass comfortably with another. This is perhaps the most significant way a specialist broker adds value in debt consolidation cases.
What if you fail the affordability assessment?
If your debt consolidation remortgage application is declined on affordability grounds, alternatives include a second charge mortgage with a different lender whose affordability model may be more favourable, partial consolidation of only the most expensive debts to reduce the total borrowing required, a debt management plan or other informal arrangement to manage the debts outside of a mortgage, or waiting and improving your financial position before reapplying.
Getting specialist help
Nesto matches you with an FCA-regulated debt consolidation broker who understands affordability criteria across the whole market. They will identify the lenders most likely to approve your application and structure it for the best chance of success. The service is free with no obligation. Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.