We are about to start looking for a bigger home and we will need a significantly bigger mortgage. We are not looking to borrow an unrealistic amount, and our finances and credit ratings are in very good shape.
We have quite a bit of disposable income, not having a car or children – but most of it goes on spending in pubs and restaurants. These all appear on our bank statements – especially mine – as contactless card payments.
I’m worried that this will work against us with lenders when they check our statements as they will see it as an indication of financial fecklessness. My wife says not to worry as it is discretionary spending that can be cut back on by choice.
Who is right? And should we start paying by cash to remove these items from our statements?
Lenders might prefer you use contactless as it provides a transparent view of your spending
Will Kirkman, of This is Money, replies: The idea of someone going through your bank statements is scary enough without the added pressure of applying for a mortgage, so it’s no wonder people stop to think about their spending when it nears time to switch to a new deal.
The short answer is that you are unlikely to be turned down if you spend a chunk of your disposable income in the pub – but as with all these things, it’s complicated.
Andrew Montlake from mortgage broker Coreco replies: This is a really good question and one we get a lot. There is much confusion as to what lenders actually look at on spending patterns and what constitutes good or bad financial behaviour in their eyes.
Andrew Montlake of mortgage broker Coreco
The good news is that you needn’t worry, you are allowed to have a social life!
Lenders look at your credit score as a whole which, if you have always paid your bills, credit cards or any loan payments on time should be fine.
Where bank statements are concerned the key things they are looking at are whether you go into overdraft and if you do, is it within limits.
They don’t like things like payday loans, lots of online betting transactions or even joke references from friends when they may transfer money to you. It may seem funny at the time, but lenders sometimes don’t see the humour.
They also look for anything regular like direct debits to see where your monthly spending is already allocated. Insurance costs, pension and school fees are other items.
In your case, with a healthy disposable income and as long as your bank accounts are run satisfactorily, there should be no issues. Spending in pubs and restaurants is of course totally discretionary and most underwriters will understand that your lifestyle will change once you have a bigger mortgage.
Saying this, in the three months leading up to getting a mortgage I would perhaps start to act as if you were paying a mortgage and reign in any extravagances or big lump sums that may lead to questions.
Make sure you keep well within overdraft limits and present the best picture possible to the underwriters. If nothing else this is good preparation to get you used to budgeting with a larger mortgage payment.
From what you have said I don’t think there is anything to worry about and no need to suddenly revert to cash to pay for everything. Lenders are comfortable with credit as long as it is all paid on time without any issues.
I would also recommend checking your credit score with a reputable firm such as Noddle, Experian or Equifax. This will tell you if there are any concerns at all and provide you with a credit score. The closer you can get to 999 as a score the better, but again if it is a little way off that do not worry.
I would always recommend you speak to a professional mortgage broker if you have any concerns at all and find the most suitable product and lender from the myriad of choices now available. And don’t deny yourself that beer or bottle of wine just yet.
Maria Harris, director of retail mortgages, Atom Bank
Maria Harris, director of retail mortgages at Atom Bank, replies: Firstly, good luck with the house hunting. It’s great to hear that you’ve already got your finances and credit into a good shape before you’ve started looking for your new home.
For anyone looking to apply for a mortgage, it’s always helpful to have a history of paying your bills on time and making sure that your credit score is healthy.
There are lots of simple ways to keep your credit healthy and happy, including making sure that you’re on the electoral roll at your current address, not having too much credit, not applying for lots of credit in the months leading up to your mortgage application, and not using credit or store cards near their limit for extended periods of time.
We usually recommend that you access your credit report at least six months before applying for a mortgage and check that everything on there is correct and up to date.
When assessing your affordability, most lenders will look at how much your new mortgage payment is going to be, how much you’re paying on other credit such as credit cards, loans, car finance, etc and then how much you need to live on including normal household expenses.
You should act as if you were paying a mortgage in the months leading up to your application
We do look at how many times your income a mortgage will be, but we also want to make sure you have enough money to live on and a bit of a buffer in case the cost of living or interest rates go up in the future.
As responsible lenders, we do have an obligation to look at how you manage your overall financial health too and this could include discretionary spending.
We know that people will either save or spend their spare cash and this will largely depend on your own personal circumstances and lifestyle, so having a good social life and eating out a few times a week isn’t something we’d worry about if it’s comfortably within your income.
What we would be concerned about is anyone regularly using an overdraft or credit to finance a lifestyle that they couldn’t afford, or if you were spending a lot of money on something that might affect your ability to keep up your mortgage payments in the future.
Using contactless can be an easy and quick way to spend money when you’re out and about but it also means that you have visibility of where you’re spending the most and that you can see where you’d need to cut back if you had less to spend.
For your mortgage lender, it should be a positive that you have a transparent view of your spending and that you’re able to show that you have control of your finances but it probably wouldn’t do any harm to have an odd night in and save a bit of cash before you move too.