There are no two ways about it – your spending habits can significantly impact your chances of mortgage approval. Mortgage lenders want reassurance that you can meet the monthly mortgage payments and will look at how you spend your money to assess whether you are a reliable borrower.
Mortgage lenders will assess your spending habits as part of their mortgage affordability assessment. Certain patterns, like regular gambling or relying on payday loans, can raise red flags and harm the chance of approval.
These spending patterns may suggest financial instability to a mortgage provider, who may be hesitant to approve your mortgage application.
Read on for Goldmanread’s guide on how spending habits affect mortgage applications, what mortgage lenders look at and how to improve your chances of approval.
If you intend to apply for a mortgage in the near future and are concerned about how your spending will be assessed, please contact Goldmanread for friendly, nonjudgmental advice today.
We can advise you on which lenders are best for your circumstances and guide you through the mortgage application process to increase your chances of being approved.
Why do lenders care about your spending habits?
A mortgage is agreed upon on the basis that you will be a reliable borrower, i.e., you can afford the monthly mortgage repayments, are unlikely to default, and will fully repay the debt to the mortgage lender at the end of the term.
The biggest evidence lenders have for your reliability as a borrower is to look at how you manage and spend your income.
If your credit rating is poor or you have a history of gambling or taking out payday loans, lenders will consider you a higher-risk borrower. While they may still lend to you, you could face higher interest rates and more rigid terms to mitigate the perceived risk.
How do lenders assess your spending habits?
Mortgage lenders assess income and expenditures in several ways. These include scrutinising bank statements and reviewing your credit report, which will provide a fair assessment of your financial situation.
Lenders typically ask to see three months of bank statements for evidence of how you handle your money. Regular patterns of overspending or reliance on your overdraft might raise concerns.
They will also look at your credit report. Your credit score is based on how you handle lines of credit and pay your bills. Regularly missed payments or high levels of debt can raise red flags and limit the number of mortgages available to you. Read more about bad credit mortgages.
What spending patterns raise concerns with mortgage lenders?
The major spending patterns that concern lenders include:
1) Missed payments on commitments such as utility bills, credit cards or unsecured loans.
2) Excessive spending on unnecessary items, such as regular payments to gambling sites and subscriptions to more, let’s say, morally ambiguous websites!
3) Payday loans are one of the major red flags for lenders. Some will look at them more sympathetically, but only in specific circumstances, i.e. if the loan has been used to help with large purchases that were considered one-off and outside of your regular cash flow. However, if you regularly rely on income from these types of loans, it will raise serious doubts about your ability to repay a mortgage.
How closely do mortgage lenders look at bank statements?
Most lenders will ask for up to three months of bank statements to see how an applicant has handled their income in the months leading up to the mortgage application.
The lender may also ask for copies of savings accounts. First-time buyers are usually asked to provide bank statements covering a six-month period to demonstrate their commitment to their house deposit.
What looks bad on bank statements for a mortgage?
In general, the following will be viewed negatively by a bank when you apply for a mortgage:
- Large cash payments (both regular and irregular). Lenders have to consider whether such payments are linked to potential fraudulent activity.
- Short-term credit (like payday loans)
- Missed monthly payments on utility bills or unsecured debts (like credit cards).
How to improve your spending habits before applying for a mortgage
If you’re planning to apply for a mortgage, it’s worth taking steps to tidy up your finances beforehand. Here’s how:
- Clear outstanding debts: Pay off credit cards, loans, or other debts where possible. Lenders prefer borrowers with minimal financial commitments.
- Check your credit report: Get a copy of your credit report to understand your credit history and score. Fix any errors and address any unpaid debts to improve your chances.
- Show regular savings: Make regular deposits into a savings account to demonstrate financial discipline.
- Reduce non-essential spending: Cut back on things like gambling and luxury purchases that might raise questions with lenders.
- Maintain a healthy cash flow: Keep your bank account in good shape, showing a steady income and controlled spending.
Should I stop spending entirely before applying for a mortgage?
No, and that would be nigh-on impossible anyhow. Lenders don’t expect you to stop living your life -they know you have to pay bills and buy food. What matters is that your spending looks reasonable and well-managed.
If you have a big expense coming up, like a holiday or a wedding, try to plan it well in advance of your mortgage application. Remember, lenders usually look at the last three months of your bank statements, so focus on showing good habits during this time.
Need help preparing for your mortgage application? Get in touch
Applying for a mortgage can be daunting if you have a poor credit history or are unsure how your spending habits might affect your chances. At Goldmanread, we specialise in helping clients secure mortgages, no matter their financial situation. As mortgage broker, we have access to a wide range of lenders and deals, so we can pinpoint the most appropriate deal for your circumstances.
Whether you’re a first-time buyer, self-employed, or looking to move up the property ladder, we’ll guide you through every step of the application process.
Get in touch today to see how we can help make your dream of homeownership a reality.
Frequently asked questions about spending habits
How do large cash deposits on bank statements affect a mortgage application?
A single large transaction, like a gift from a family member for your deposit, usually won’t cause issues as long as you can explain it. Just make sure it’s documented and disclosed during your mortgage application.
How far back do lenders check my bank statements?
There is no set rule regarding how far back lenders check bank statements, but as a general rule, they will want to see at least three months of bank account history.
If you’re a self-employed applicant making a mortgage application, lenders are likely to ask for three months’ worth of business bank statements and your last two to three years’ tax returns.
Can lenders see your bank account balance?
Lenders generally require the last three months’ bank statements, so your most recent statement will include a snapshot of your bank balance.
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