How is affordability assessed when lending money?

How is affordability assessed when lending money?

With most of the news highlighting how unaffordable housing is or is getting I thought it would be interesting to post how banks assess affordability when applying for a mortgage.

Affordability is a matter of opinion and as we all know opinions vary. In our case the opinions are based upon the banks assessment of your overall income versus total outgoings per month equating to a measurement called UMI (Uncommitted Monthly Income)

Banks use this measurement UMI (Uncommitted Monthly Income) to assess whether a client can ‘afford’ the proposed mortgage. This in essence is their opinion on your ability to service it.

UMI requirements based upon deposit size

There is a direct correlation between size of deposit and the barometer of UMI required based upon a specific deposit.

See below UMI requirements based upon deposit size. (note these are subject to change)
+20% Deposit - < $100 UMI
<20% Deposit - $1,000+ UMI

<10% Deposit - $1,400+ UMI

What is UMI (Uncommitted Monthly Income)

Banks assess affordability based upon UMI which is what remains of your income (on paper) after all of your living expenses, credit cards and proposed mortgage repayments are deducted.

What people fail to generally realise is that regardless of your actual monthly cost of living expenses the banks will revert to their own minimum expense if yours fall below their own calculated minimums. This can have a swing of up to $1,000 on your uncommitted monthly income!

On top of this each bank uses a different mortgage rate for qualification purposes ranging from 4.79% to 7.40%. That’s a difference of $1,603 UMI (Uncommitted Monthly Income) based on a mortgage of $400,000 over 30 years.

That is potentially a $2,603 swing per month of uncommitted monthly income difference between the banks. In reality your position is the same but opinions of your position produce a different lending capacity per bank.

So from a lending perspective, affordability it seems is in the eye of the beholder and fortunately as a mortgage adviser we have many eyes.

The bottom line is the most important opinion when lending money is yours as you are liable for the debt and you have to live your life with left over income once all of your expenses are covered. As long as you are comfortable you can afford it then you should most certainly be working with a mortgage adviser to ensure you can reach your full affordable potential in terms of borrowing.

This is one of many reasons why you should work with a mortgage adviser and I will be posting various other differences in criteria and policy as we go.