This guide was last updated 9 August 2024
When applying for a mortgage, lenders scrutinise your bank statements as part of their assessment process. Understanding what they look for can help you prepare your financial profile and improve your chances of securing a mortgage. Here’s a comprehensive guide to what lenders typically examine on your bank statements.
Regular Payments
Lenders want to ensure that you have a stable and sufficient income to meet mortgage payments. They will look for regular deposits that align with your stated salary or income source. This includes:
Bonuses and Overtime
If you receive bonuses or overtime pay, lenders will assess the frequency and consistency of these payments. They often prefer regular income, but consistent bonuses and overtime can positively impact your application.
Essential Expenses
Lenders will examine your essential monthly outgoings, such as:
Discretionary Spending
Your discretionary spending (e.g., dining out, entertainment, and holidays) will also be assessed to understand your financial habits and remaining disposable income.
Debt Repayments
Any existing debt repayments, such as:
Lenders will calculate your debt-to-income ratio to ensure you can manage additional mortgage payments.
What is a Debt-to-Income Ratio?
The debt-to-income (DTI) ratio is a key financial measure for mortgage lenders, comparing a borrower’s total monthly debt payments to their gross monthly income. It’s calculated by dividing monthly debt payments by gross monthly income and multiplying by 100. For instance, if you pay £1,500 in debt each month and earn £4,000 before taxes, your DTI ratio is 37.5%. This ratio helps lenders see if you can handle additional debt.
Lenders use the DTI ratio to assess risk and determine how much you can afford to borrow. A lower DTI ratio means you’re less risky and more likely to get better loan terms, including lower interest rates. Typically, a DTI below 36% is good, though some lenders accept up to 43%. This ensures you don’t take on more debt than you can handle, reducing the chances of default.
Understanding your DTI ratio is also important for your financial health. It shows how much of your income goes towards paying debts and can alert you when it’s time to cut down on borrowing. For UK borrowers, keeping a healthy DTI ratio not only boosts mortgage approval chances but also helps maintain long-term financial stability.
Subscriptions and Regular Payments
Regular payments for subscriptions (e.g., gym memberships, streaming services) and insurance policies will be noted.
Account Conduct
Lenders assess how you manage your account. Key indicators include:
Savings Habits
Having a healthy savings balance and regular contributions to a savings account demonstrates financial discipline and can strengthen your application.
Large Deposits and Withdrawals
Unexplained large deposits or withdrawals may raise questions. Lenders will require explanations for significant transactions to ensure they are legitimate and not indicative of financial instability or irregular income sources.
Gambling Transactions
Regular gambling transactions can be a red flag, indicating potential financial risk and instability. Occasional small amounts are usually acceptable, but frequent or large gambling expenses can negatively affect your application.
How a £10 bet on the Grand National could cost you your mortgage
Standard Review Period
Lenders typically review bank statements from the past three to six months. This period provides a comprehensive overview of your financial behaviour and income stability. If asked for them, you should make sure that the latest three months are covered with no gaps or missing pages.
Consistency Over Time
Consistency in income and expenditure over the review period is crucial. Significant fluctuations can raise concerns about financial stability and predictability.
By understanding what lenders look for on your bank statements, you can better prepare your finances and increase your chances of mortgage approval. Maintain stable income, manage your expenditures, and avoid financial red flags to present yourself as a reliable borrower.
For a friendly chat with one of our down-to-earth mortgage experts please call us on 020 7220 5110 or send us a message.
Your home may be repossessed if you do not keep up repayments on your mortgage.
There may be a fee for mortgage advice. The actual amount you pay will depend on your circumstances. The fee is up to 1% but a typical fee is 0.3% of the amount borrowed.