What Outgoings Should Be Considered When Applying for a Mortgage?

While a healthy income helps determine your potential borrowing limit, it’s only part of the equation when it comes to getting a mortgage. Lenders are typically interested in a much broader picture of your financial circumstances, including all of your incomings and outgoings.

The Financial Conduct Authority (FCA) also imposes strict affordability rules on mortgage lenders, which requires them to ‘stress-test’ your finances. This means they must check whether you could still comfortably manage your repayments if interest rates rise.

Most lenders split your spending into three categories, financial commitments, essential living costs, and discretionary spending. They will assess these outgoings on your bank statements, so it helps to understand how they look at each type before you apply.

Financial Commitments

This is any type of financial contract which you have a legal obligation to repay. Because these are debts with mandatory monthly repayments, lenders deduct them directly from your net income when calculating affordability for your mortgage.

Key examples include:

• Credit cards

• Personal loans (unsecured)

• Car finance

• Child maintenance

• Buy now, pay later (BNPL) loans such as Klarna or Clearpay

• Existing mortgages

• Secured loans and business loans in your own name

Essential Living Costs

Everyone has basic essential outgoings alongside their rent or mortgage. While lifestyle factors can vary significantly, people need to eat and pay utility bills. Unlike commitments, this type of outgoing is not set in stone in terms of the amount you spend. It's possible to cut back on most essential living costs, for example, switching your energy company or grocery shopping from a discount supermarket.

However lenders know that most of these costs cannot be completely eliminated. Reducing your living costs a few months ahead of mortgage application can be helpful, but keep in mind that costs will be compared against the Office for National Statistics (ONS) average household expenditure.

Common essential living costs include:

• Utilities - Electricity, gas, water and phone/internet costs

• Council tax

• Groceries - including food, drinks and household cleaning products

• Personal care - Items such as toiletries and medicine

• Transport - Vehicle expenses such as fuel, car insurance, taxes or public transport

• Childcare costs - such as nursery or school fees, childminders, and private tuition

• Insurances - buildings insurance is an essential mortgage requirement for most lenders but contents, life and health insurances are also viewed as essentials

• Pension contributions

Discretionary Spending

Discretionary outgoings are things you choose to spend your money on. This area gives you the most flexibility as they are typically easiest to cut back on, and can often be removed completely. Excessive discretionary spending can bring your financial management into question, however, cutting back too far can look unrealistic. Everyone needs some form of social life, so it’s important not to cut out all non-essential spending to maximise your mortgage affordability. Especially if you’re taking a mortgage over a long duration.

Discretionary spending may include:

• Subscriptions or memberships - Such as gym, sporting season tickets, streaming services (Netflix, Spotify) and weight-loss jabs. In fact, the latter may be viewed as an essential outgoing if linked to a health condition

• Socialising - restaurants and takeaway costs, pub visits, and entertainment (festivals, cinema, concerts, sporting events

• Holidays - including any non-essential travel costs

• Shopping - Non-essential consumer goods such as clothing, technology, DIY products. A small monthly minimum is likely to be included for clothing and footwear given that some expenditure is usually required

How to Optimise Your Outgoings Before Applying

If you plan to apply for a mortgage in the next three to six months, there are a number of proactive steps you can take to reshape how your outgoings are reflected on your bank statements. These include:

1. Bank statement audit: Review the last 3-6 months of bank statements (for every account if you have multiple). This is a good way to discover any direct debits or standing orders you have set up that are for services you no longer use

2. Clear or reduce credit balances: Paying off small credit card balances or reducing larger loan or car finance agreements will reduce your future monthly repayments, or even better, remove them from the equation entirely. As well as potentially increasing affordability, this can improve how your overall financial responsibility is viewed

3. Pause or end unused subscriptions: Cutting some of your streaming services or reducing the tier of your gym memberships in the months leading up to your application is always a good idea

4. Avoid new credit: New credit cards, any form of financial borrowing in the period before your mortgage application is a bad idea. This can impact your credit score and will inevitably reduce your affordability, as this will be classed as another commitment

5. Work with a whole of market mortgage broker: Because each lender uses different affordability criteria, speaking to an experienced broker can help ensure that you apply to those lenders most likely to suit your financial profiles, and be able to offer the amount you need

Get started here to begin a free, no-obligation chat with a broker who specialises in mortgage affordability and can help optimise your maximum borrowing.