Credit Score Basics > What is an affordability check?

What is an affordability check?

Wollit Team3 minute read · Updated 2nd July 2024

When you apply for a loan, mortgage, or credit card in the UK, lenders will usually run an affordability check. You might also encounter an affordability check when renting. This check helps lenders and landlords see if you can afford to make the monthly payments, and it's a crucial step to make sure you don’t overextend yourself.

How does an affordability check work?

An affordability check is when the lender looks at your income, expenses, and debts to decide if you can afford the new loan or credit. They want to make sure you won't struggle to make the payments.

During the check, lenders will look at:

Income: How much money you make from your job, business, or other sources.
Expenses: How much you spend on things like rent, bills, and living costs.
Existing debts: Any loans, credit cards, or other debts you already have.
Stress testing: They may also check if you could still afford the payments if your situation changes, like if your income goes down or interest rates go up.

The affordability check helps lenders lend responsibly and helps you avoid taking on more debt than you can handle.

Why are affordability checks important?

Affordability checks are important for both you and the lender:

Reduces risk for lenders, since they’ll know that you won’t borrow more than you can afford.
The check also helps stop you from getting into debt you can't pay back, avoiding problems like bankruptcy.
Finally, it can also protect your credit score because missed payments can hurt your credit, making it harder to get approved for loans in the future.

How do affordability checks work for different kinds of credit?

The affordability check may be a bit different depending on what you're applying for:

For mortgages, the check is very thorough because a mortgage is a big, long-term loan. Lenders will look closely at things like the value of the property, your deposit amount, and if your situation might change (like having a baby or retiring).
For smaller loans and credit cards, the check may not be as detailed, but lenders will still look at your income, expenses, and existing debts.
Renting can also sometimes require an affordability check. While rent isn't technically credit, some landlords or letting agencies will also want to understand if you can afford to pay the rent each month. Their check won’t be as detailed, though, and often just showing that your monthly salary is high enough should be sufficient to pass it.

How can I improve my affordability?

If you're worried about passing an affordability check, here are some tips:

Look for ways to cut back on unnecessary spending to improve your affordability.
Pay down debts as much as you can. As a bonus, this also helps you improve your credit score.
Get a higher-paying job or take on extra work. This might not be easy to do, but it can help improve your affordability.
Understand what lenders see by using an affordability calculator. Most banks have a mortgage or loan affordability calculator on their website.
Finally, improve your credit score. This helps your affordability in a roundabout way: having a good credit score can mean lower interest payments, which improves your affordability because you’ll be asked to pay less each month.

This final piece of advice is also one of the easiest to implement. If you want to get a second job, there are only so many hours in a day. And, often, cutting back on expenses any more than you already have just isn’t possible.

But improving your credit score is definitely doable, it just takes a bit of time and care. Its impact can be significant, though.

For example, let’s say you’re taking a 30-year mortgage for a property worth £500,000, which is actually lower than the average property price in London. You put down a deposit of £100,000. Since a move from one credit score band to another can mean as much as 1% increase in the interest rate you’re offered, you could be looking at over £90,000 paid on top, simply because of your extra “riskiness”.

This is why it’s so important to work on your credit score before applying for credit. A better credit score can help you both save money and pass an affordability check.

Luckily, now there are many apps that can help you build and improve credit.

One such app is Wollit. Wollit is an app available both on Android and iOS, and it works by reporting a fixed-fee monthly subscription as a loan repayment to all three credit reference agencies (Experian, Equifax, and TransUnion).

Eventually, this can help you improve your credit score so you pay less in interest, making future loans more affordable and removing the need for you to cut back on every single expense or get a second or third job.