Affordability

What is affordability?

Affordability is a measurement used by lenders to assess whether you will be able to make repayments on the loan or form of finance you are applying for in addition to your current financial commitments.

Your income will be factored in to this, however depending on the type of financial product you are applying for you may not have to submit proof of this, and outgoings not related to credit agreements (such as monthly food or fuel costs) might also not be asked for. Typically this may be required during applications for substantial loans such Mortgages or car finance, but not for smaller secured loans such as store finance.

Affordability checks were introduced to ensure the number of people that default on loans is kept to a minimum. In recent years, more stringent checks have been introduced, particularly for mortgages following the number of people defaulting on payments leading up to and during the recession.


Q: How is it worked out?

A: Different types of credit will have different affordability criteria/assessment methods, and this may differ again between lenders so there is no single answer to this. For mortgages, providers will include a ‘stress test’ to ensure you’ll still be able to make repayments in the event that interest rates increase, a worldwide recession hits and house values drop.

Similarly, when applying to rent a property the landlord may use a multiplier that ensures your monthly income is at least two or three times more than the amount of your monthly rent payments.

Q: What is the difference between affordability and creditworthiness?

A: Affordability is a measurement of your ability to repay a loan, whereas Creditworthiness is the lender’s assessment of how likely they would be to offer you finance and at what rate where applicable. This is based on factors including (but not limited to) your previous credit history, your public data and the lender’s own criteria.

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