How to Get Your Bank Statements Mortgage Ready in a Few Easy Steps
When you apply for a mortgage, one of the items that the lender puts a magnifying glass to is your bank statements. They will scrutinise those papers for evidence of poor spending habits and bad financial management. Therefore it goes without saying, a little work on getting your bank statements mortgage ready will pay huge dividends. Here, you’ll learn how to clean up your bank account so that your bank statements will support your mortgage application.
Why do my bank statements matter?
Many years ago, banks would make their decision on whether to lend to you for a mortgage based on the amount of money that you earn. In the early 2000s, that criteria changed and banks started to lend after assessing how much you could afford. The Bank of England (BoE) introduced rules for banks to follow when making this decision, and these rules are regularly updated. In the latest revision of lending rules, the BoE put in place a tough mortgage ‘stress test’. The outcome means that you must be able to prove that you can afford to continue to pay your mortgage if interest rates rise by up to 3%. How does a lender check this? They often look at what you are currently spending and then see if there is any elasticity in your finances. They may ask if you could make your income stretch further. The best place to get this information is from your bank statements - when your statements look good, you look good to a mortgage lender.
What do lenders examine on my bank statements?
The mortgage lender will usually ask for 3 months bank statements to examine evidence of both your income and expenses. On the income side, they will look for entries that include:
Your earnings, bonuses, commissions, and overtime pay
Income from investments
Pension income
Other income types, such as child maintenance
State benefits
On the expenses side, the lender will look for:
Regular bills (such as utilities)
Other loan payments
Insurances
Credit card payments
Maintenance payments
Gambling
They will also look for evidence of other spending habits, such as how much you spend on entertainment, going out, clothes, childcare, etc. They gather all of this information together and then run it through their systems to figure out if you could afford:
Current mortgage payments and future payments if interest rates were to increase
Your mortgage payments if your circumstances change tomorrow (e.g. you have a baby, you take a career break, etc.)
A lender will want a ream of paperwork to back up your claims that you can afford the mortgage payments. They will want to see pay slips. They will want to see your business accounts if you’re self-employed. They will ask for P60s. The big piece of evidence to support your claim is your bank statements. That is where they will find details of what your finances are really like, and they’ll unearth all of your spending habits - good or bad. So, it pays to spend time and effort on making sure they’ll tell the story that they should.
4 ways to prepare your bank statements for a mortgage
1. Eliminate unnecessary direct debits
Closely examine your bank statements. Are there any subscriptions coming out that you no longer want or need? Cancel them. You may have inadvertently signed up to a monthly membership deal when you bought something online, so take the time to discover what that £10-per-month debit is, and cancel it if you don’t actually need it. Are you paying a monthly fee for something that you no longer use? Ensure that you’re not still paying for disused accounts, such as an old mobile phone that you no longer use.
2. Switch energy suppliers and compare your insurances
Every year, you should take the time to review your utility bills, since you could save hundreds of pounds each year by doing so. Similarly, don’t simply accept that your current insurance provider will renew your contract at their best rate - they probably won’t. Take a few minutes to compare all of your insurances against other quotes, and you’ll be surprised at how much you could end up saving. (A friend of mine did this, and his current car insurance provider cut his annual premium by more than £100).
3. Use your credit card more - and clear the balance monthly
Use your credit card to pay for more. This habit will have several benefits, including:
The goods you purchase are insured
Your spending habits are hidden (because you make a single payments each month from your bank account)
You will be building a credit history, and therefore showing that you are responsible with credit
4. Cut your spending and increase your income
Many people spend money that they don’t need to by falling into bad spending habits. The savings that you could make might include:
£1,248 per year, by drinking instant coffee at work instead of sipping on those daily Costa coffees
£800 per year when you take a packed lunch to work instead of buying a Tesco meal deal
Up to thousands of pounds per year by wasting less food and buying more economically. Plan your meals ahead of time and buy cheaper brands - you really can eat well for less.
Here’s a shopping tip: always take a list with you, and then only buy what’s on the list.
Finally, think about how you could increase your income. Yes, you could work longer hours, or get a second job. But what about using your assets better? There are plenty of people making ‘free money’ by renting out their driveway as a commuter’s car parking space. Similarly, did you know that your spare bedroom could be worth as much as £7,500 per year to you - tax free? (See the ‘Rent-a-Room Scheme’ for more information). Have a think about what assets you have that you could utilise in a similar way, and you could easily find an extra income.
For more tips on how to save money and budget effectively, see this article.
Making yourself an attractive proposition to mortgage lenders isn’t easy, especially when they have so many affordability rules to work to. However, by a combination of clever spending, intelligent budgeting, and constant financial vigilance, you could get your bank statements mortgage ready. In summary:
Review your bank statements
Eliminate unnecessary direct debits
Budget and spend more wisely
Review and switch your major costs to cheaper options
Put spending on credit card - and pay the full balance every month
Think of ways in which you might use your assets to increase your income
For more tips on how to make yourself more attractive to mortgage lenders, contact Mortgage Thoughts today.
