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What Is Mortgage Capacity And How Is It Calculated?

The first part of a new calendar year and the last part of a financial year is often a time when people take stock of what they currently have and start to consider what tomorrow will bring for them.

For many, it is a time to either take their first steps onto the property ladder or to sell up and search for something new, and according to a Moneyfacts survey reported in The Independent, there are more residential mortgage products to choose from in early 2024 than at any point in the last 15 years.

However, for some people, that fresh start can come from exceptionally unfortunate circumstances, ones with far-reaching ramifications beyond the clear personal hardship that is most evident.

A legal document known as a mortgage capacity report can help make the financial complexities of separation easier, but to understand why, it is important to understand what mortgage capacity means in this context, how it is calculated and what it is for.

Explaining Mortgage Capacity

Mortgage capacity, at its broadest possible definition, is a person’s maximum borrowing potential, typically calculated in the context of a mortgage capacity assessment, a document that is legally required in several scenarios related to the family court.

This is not necessarily the standard borrowing criteria, a mortgage calculator or an agreement in principle used by lenders to confirm suitability for a mortgage. This can be sufficient in some cases, but in others, a mortgage capacity assessment (MCA) may become a requirement.

An agreement in principle is simply a guideline, useful for highlighting your ability to buy a property but would not be enough to satisfy a court.

An MCA can be required for several types of financial settlement. However, typically it is used as part of divorce proceedings for a range of different purposes.

The main role it has is in illustrating whether each party in divorce proceedings has the capacity to manage financial responsibilities related to an existing mortgage and has the capacity to secure housing, given that by definition a divorce would necessitate finding new accommodation.

Often this is used when negotiating financial settlements, as it will provide a basis for the needs and capacities of both parties and provides an independent piece of evidence if attempts to negotiate a settlement fail and it falls into the hands of a judge to arbitrate.

There are various types of MCA, but the three main ones that are requested are:

  • A standard, single-person capacity report.
  • A joint mortgage capacity report that will cover both parties of a divorce.
  • A “no-mortgage” capacity report that will illustrate that the person who requested it is unable to qualify for a mortgage.

An MCA will include details relevant to a particular divorce’s circumstances but there are several categories of information that will be covered.

One of the most obvious is the borrower’s income, which not only includes salary but also income sources from self-employment and capital gains such as those made through investments, as well as rental income for people who rent or let buildings.

As well as this, the existing debt and financial commitments a borrower has will be a factor, as a high income may be offset by a lot of outgoings that mean that affordability is not as guaranteed as one might expect. This is sometimes but not always expressed through a debt-to-income ratio (DTI).

Similarly, the current status of the mortgage itself and the level of equity relative to its current market value will be all factored into the report.

The borrower’s credit history, as well as common credit score criteria, will also be factored in, as will other common lending criteria. This will ascertain the amount a borrower can take on whilst factoring in the affordability stress tests required by the FCA.

As well as this, the deposit level will be included as this can affect the overall amount a borrower can expect to be able to apply for, and thus the size and scale of property they can reasonably afford. 

Finally, the borrower’s monthly outgoings, including taxes, insurance payments, utilities and other essential, immutable payments will be factored into this capacity assessment.

This can include dependents and children, as maintenance payments, childcare and familial arrangements can vary dramatically between different cases.

Once this information and other, bespoke, relevant information is included, the qualified broker drafting the report will research with different lenders to see what types of mortgages are possible.

This includes the amount borrowed, for how long, different interest rates, fees, affordability stress tests and the ultimate repayment figures a borrower could expect, as well as signalling if someone would not be able to get a mortgage.

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