What is an Affordability Assessment?

What is an Affordability Assessment?

An affordability assessment is the process which lenders complete to establish if you can afford to repay the loan repayments over the term of the loan.

Affordability assessments take your incomings and outgoings into consideration to help lenders assess whether you can afford to make repayments over the full length of a loan and if the loan is sustainable for you.

Whether you’re getting a mortgage or taking out a home collected loan, any responsible lender will look at your financial situation to help determine if you can afford to pay back the money you’ve applied to borrow plus any interest and charges.

How it works

A lender will typically look at your financial circumstances to understand whether a potential loan would be affordable, sustainable and suitable. This is known as the creditworthiness assessment. This will involve the lender reviewing information provided by the applicant, such as incomings and outgoings, alongside information gained by doing a credit reference check.

Each lender’s criteria will vary, so the information you’re required to provide will differ depending on the loan provider. Generally, they’ll require things like:

  • Proof of any regular income you have, including your net monthly or weekly wage, benefit payments, or any extra income you receive (such as child maintenance)

Information about your personal and living expenses, which may include your mortgage payment or rent, utility bills, food bills, and other outgoings including any other loan repayments you might have

  • A credit reference check

Taking all this into account, the lender will calculate whether you’ll be able to afford the loan and keep up with the payment schedule that’s been proposed. They can then make a decision to lend you the amount you’ve requested, based on whether the loan is suitable for you.

What is sustainability?

Sustainability considers how the loan will fit in with your circumstances and whether it’s an appropriate agreement. This means that you can afford to make the repayments over the full length of the loan and you’ll be able to pay back without causing financial problems. For a loan to be sustainable, it shouldn’t cause the borrower ‘undue difficulties’, meaning:

  • You should be able to make repayments on time while still being able to afford your other commitments
  • You shouldn’t have to borrow more money or sell major assets to make the repayments
  • The loan should be repaid in full over the loan term

 What will happen during an affordability assessment?

The affordability assessment process will vary, depending on which lender you’ve applied to borrow money from. After you’ve made an application, you may need to sit down with the lender to talk about your loan, or they might do it remotely.

The lender may need to see paperwork that supports your application, which could include:

  • Proof of ID (such as an unexpired passport)
  • Proof of address (such as an unexpired driving licence)
  • Proof of income (such as a recent payslip)
  • They may talk to you about your needs and get to know your situation.

To ensure the loan arrangement is affordable, suitable, and sustainable for you, it’s important to be as accurate as possible when outlining your incomings and outgoings.

What if I fail an affordability assessment?

If the affordability assessment finds that you can’t afford to pay back the loan amount requested, this will leave a footprint on your credit file which may impact your ability to obtain credit in the future. If you are unclear as to why you have failed the affordability assessment, speak to the lender directly or alternatively you could obtain a copy of your credit file from the credit bureau.

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