Understanding Mortgage Lending Criteria

UK mortgage lenders use sophisticated assessment criteria to evaluate borrower creditworthiness and determine lending terms. These criteria ensure responsible lending while balancing risk management with market accessibility, following regulatory guidelines established under the Mortgage Market Review (MMR).

Understanding lending criteria terminology is essential for successful mortgage applications, enabling borrowers to prepare properly and choose appropriate lenders based on their circumstances and financial profile.

Application Success

Knowledge of lending criteria helps borrowers understand their position in the market, identify suitable products, and prepare applications that demonstrate compliance with lender requirements and regulatory standards.

Affordability Assessment Terms

Affordability Test
Comprehensive assessment of borrower's ability to meet mortgage payments under current and potential future circumstances, considering income, expenses, commitments, and stress scenarios.
Example: Lender reviews £60,000 income, £2,000 monthly expenses, £300 credit commitments, then stress tests at rates 3% higher than application rate.
Debt-to-Income Ratio (DTI)
Percentage of gross monthly income committed to debt repayments including proposed mortgage, used to assess borrowing capacity and financial stress levels.
Example: £5,000 monthly income with £2,200 total debt payments equals 44% DTI, within typical 45% maximum limits for most lenders.
Income Multiple
Maximum loan amount expressed as multiple of annual income, varying by lender and borrower profile, typically ranging from 4x to 5.5x annual income for residential mortgages.
Example: £80,000 annual income at 4.5x multiple allows maximum £360,000 borrowing before other affordability constraints applied.
Stress Testing
Assessment of affordability using interest rates significantly higher than application rate to ensure borrowers can cope with potential rate increases during loan term.
Example: Application at 3.5% stress tested at 6.5% to ensure payments remain affordable if rates rise substantially over fixed period.

Income Assessment

Verification of employment, salary, bonuses, and other income sources with varying recognition levels.

100% Basic / 50% Bonus

Expenditure Review

Analysis of committed expenditure including credit commitments, living costs, and dependents.

£500-£800 per adult

Stress Test Rate

Rate used for affordability testing, typically 2-3% above application rate for stress assessment.

Application Rate + 3%

Maximum DTI

Upper limit for debt-to-income ratio including proposed mortgage and existing commitments.

40-45% of Gross Income

Loan-to-Value (LTV) Criteria

Loan-to-Value Ratio (LTV)
Mortgage amount as percentage of property value, fundamental risk metric determining rate, product availability, and additional requirements like mortgage indemnity guarantee.
Example: £240,000 mortgage on £300,000 property equals 80% LTV, accessing standard rates without additional insurance requirements.
LTV Banding
Risk categories based on LTV ratios with different rates, terms, and criteria, typically in 5% bands from 60% to 95% LTV for residential mortgages.
Example: 75% LTV band offers rates from 3.2%, while 90% LTV band starts from 4.1% reflecting higher risk profile.
Combined LTV (CLTV)
Total borrowing including first mortgage plus any additional secured lending as percentage of property value, used for second charge and further advance assessment.
Example: £200,000 first mortgage plus £50,000 second charge on £300,000 property equals 83.3% CLTV for risk assessment.
Purchase LTV vs Remortgage LTV
Different LTV calculations for purchase (loan vs purchase price) versus remortgage (loan vs current valuation), affecting available products and rates.
Example: Purchase at 85% LTV may remortgage at 75% LTV due to property appreciation, accessing better rates and removing MIG.
LTV Band Risk Level Rate Premium Additional Requirements
60% LTV Very Low Base Rate Standard criteria
75% LTV Low Base + 0.1% Standard criteria
85% LTV Medium Base + 0.3% Enhanced affordability
90% LTV High Base + 0.6% Stricter criteria + MIG
95% LTV Very High Base + 1.0% Limited products + MIG

Credit Assessment Criteria

Credit Score Threshold
Minimum credit score requirement for mortgage approval, varying by lender and product, typically ranging from 600-750+ depending on risk appetite and LTV.
Example: High street lender requires 700+ Experian score for standard products, while specialist lender accepts 550+ for adverse credit products.
Credit History Depth
Minimum credit file history required for assessment, typically 12-36 months of established credit agreements and payment history for reliable risk evaluation.
Example: First-time buyer needs 24 months of credit card history plus 12 months employment for standard residential mortgage application.
Adverse Credit Scoring
Assessment methodology for borrowers with credit impairments, considering type, severity, value, and recency of adverse items plus explanation and rehabilitation evidence.
Example: Single £500 default 2 years ago scores differently than recent £5,000 CCJ, affecting rate, LTV, and lender selection options.
Search Footprint Impact
Effect of credit searches on credit file and scoring, with multiple mortgage searches in short period having minimal impact due to rate shopping recognition.
Example: 5 mortgage searches in 14 days count as single inquiry, while credit card applications throughout year create multiple separate impacts.

Credit Assessment Factors

Employment & Income Criteria

Employment Status Assessment
Evaluation of employment type, stability, and income security affecting lending decisions, with different criteria for employed, self-employed, and contract workers.
Example: Permanent employee needs 3 months payslips, while self-employed requires 2-3 years accounts plus SA302s for income verification.
Probationary Period Lending
Policies for lending to borrowers in employment probation, typically requiring probation completion or additional evidence of job security and income stability.
Example: Some lenders decline probationary workers, while others accept with job offer letter plus 6 months employment history in same field.
Income Recognition Rates
Percentage of different income types included in affordability assessment, with basic salary at 100% and variable income at reduced rates reflecting uncertainty.
Example: £50,000 basic salary plus £20,000 bonus assessed as £50,000 + (£20,000 × 50%) = £60,000 for affordability calculation.
Minimum Income Requirement
Absolute minimum annual income for mortgage applications, typically £20,000-£25,000 for standard residential products, varying by lender policy and loan size.
Example: Lender requires minimum £25,000 annual income, preventing smaller mortgage applications despite sufficient affordability at lower income levels.

Basic Salary

Guaranteed annual income from employment, assessed at full value for affordability calculations.

100% Recognition

Annual Bonus

Variable performance-related pay, typically assessed at reduced rate based on history and guarantee.

50-80% Recognition

Overtime Income

Additional hours compensation, recognised based on regularity and 12-24 month history evidence.

50-100% Recognition

Commission Income

Sales-based variable income, assessed using average over 2-3 years with conservative recognition rates.

40-70% Recognition

Property Assessment Criteria

Property Type Lending
Different criteria for various property types based on marketability, risk assessment, and lender appetite, affecting LTV limits and rate availability.
Example: Standard house accepts 95% LTV, while ex-local authority flat limited to 85% LTV due to perceived marketability concerns.
Non-Standard Construction
Properties built using non-traditional methods or materials requiring specialist assessment, often with reduced LTV limits and limited lender panel availability.
Example: Concrete construction property limited to 75% LTV with specialist lender, compared to 90% LTV available for brick construction equivalent.
Minimum Property Value
Lowest property value acceptable for mortgage lending, typically £50,000-£100,000 depending on lender, ensuring viable security for loan amount.
Example: High street lender requires minimum £70,000 property value, preventing mortgages on smaller flats or regional properties below threshold.
Geographic Restrictions
Lending policies based on property location, with some lenders excluding certain areas due to economic concerns, flooding, or market volatility risks.
Example: Lender excludes properties in flood risk areas or declining industrial towns, requiring alternative lender selection for affected locations.

Property Constraints

Property-related lending restrictions can significantly impact available options. Check lender property policies early in the process to avoid application delays or rejections based on property characteristics.

Additional Assessment Factors

Age Criteria
Minimum and maximum age limits for mortgage applications, with older borrowers facing reduced maximum terms and enhanced affordability assessment at retirement age.
Example: Lender accepts ages 18-75 at application, with maximum term ensuring repayment by age 80, affecting affordability for older borrowers.
Residency Requirements
UK residency and right to remain criteria for mortgage eligibility, affecting available products and requiring additional documentation for foreign nationals.
Example: Some lenders require 3 years UK residency plus indefinite leave to remain, while others accept recent immigrants with valid visas.
Deposit Source Verification
Evidence requirements for deposit funds, ensuring legitimate sources and preventing money laundering, with different standards for savings, gifts, and inheritance.
Example: £50,000 deposit requires 6 months bank statements, gift letter from family, plus donor's bank statements showing funds availability.
Financial Dependents Assessment
Consideration of financial dependents in affordability calculation, with costs allocated per dependent reducing available income for mortgage payments.
Example: Two children add £600 monthly expenses to affordability calculation, reducing available income and maximum borrowing capacity accordingly.

Supporting Documentation Requirements