Affordability vs Credit Score: What Matters More to UK Lenders

When a UK lender decides whether to extend credit — whether that is a mortgage, a personal loan, or a credit card — it does not rely on a single number or a single test. The assessment process is built on two separate pillars: a credit risk assessment and an affordability risk assessment. These are legally distinct components of what regulators call a "creditworthiness assessment," and they serve different purposes.

This article explains how these two assessments work within the UK regulatory framework, what rules govern them, and where common misunderstandings arise. It does not cover how any individual lender weighs these factors against one another, as that information is commercially sensitive.

UK lenders are required by the Financial Conduct Authority (FCA) to carry out a creditworthiness assessment before entering into a regulated credit agreement. That assessment has two separate components:

1. Credit Risk Assessment: Examines the probability that the borrower will fail to make repayments (the lender's commercial risk). It looks at past behaviour (payment history, defaults, CCJs). This is where your "Credit Score" plays a role.
2. Affordability Risk Assessment: Examines whether the borrower can sustain the repayments without suffering significant adverse consequences (the borrower's financial health). It looks at income, expenditure, and existing debts.

Crucially: You can have a perfect credit score (Low Credit Risk) but still be declined because you don't have enough spare income (High Affordability Risk). Conversely, you can have high income, but be declined because of a history of missed payments. Both pillars must be satisfied.

The Regulatory Framework

The rules governing creditworthiness assessments are set out in the FCA's Consumer Credit Sourcebook (CONC), specifically in Chapter 5.

• CONC 5.2.1R requires a firm to undertake a reasonable assessment of the creditworthiness of a customer before entering into a regulated credit agreement.
• CONC 5.2.2R clarifies that this assessment must consider two things:
  1. The potential for the commitments to adversely impact the customer's financial situation (Affordability Risk).
  2. The customer's ability to make repayments as they fall due (Credit Risk).

Analysis: Credit Risk (Will you pay?)

This looks at your willingness and reliability.

• Data Source: Credit Reference Agencies (Experian, Equifax, TransUnion).
• Key Factors: Payment history, public records (CCJs, Insolvency), utilisation of existing credit, electoral roll registration.
• The "Score": Lenders use this data to calculate an internal probability of default.

Analysis: Affordability Risk (Can you pay?)

This looks at your capacity.

• Data Source: Application form (Income/Employment), Bank Statements (Open Banking), statistical data (ONS figures for living costs), and credit files (existing debt repayments).
• Key Factors:
  • Income: Verified net monthly pay.
  • Fixed Outgoings: Rent/Mortgage, Council Tax, Utilities.
  • Committed Expenditure: Existing loans, credit card minimum payments, child maintenance.
  • Disposable Income: What is left over.
• Stress Testing: For mortgages (regulated by MCOB rather than CONC), lenders must also "stress test" affordability — checking if you could still afford payments if interest rates rose significantly (typically +3% above the reverted rate).

Mortgage Multiples (The LTI Limit)

In the mortgage market, the Bank of England's Financial Policy Committee (FPC) sets "Loan to Income" (LTI) flow limits.

• The Rule: Lenders must limit the number of residential mortgages they issue at LTI ratios of 4.5 or higher.
• Impact: Most borrowers are capped at borrowing 4.5x their annual gross income. Some professional mortgages or fixed-term products allow up to 5.5x, but this is the exception, not the rule. No matter how good your credit score is, this hard affordability cap applies.

Minimum Disposable Income (DI)

Lenders set internal "floors" for disposable income. Even if the maths say you have £1 left over, a lender may require a buffer of, for example, £100-£200 per month to ensure resilience against cost-of-living shocks.

Verification of Income

Sloppy estimates lead to declines. Lenders verify income via:

• Payslips: Usually the last 3 months.
• P60: End of year tax certificate.
• SA302: For self-employed (Tax Calculation).
• Open Banking: Direct read-only access to your bank transaction history to categorise spending.

"I pay £1,000 rent, so naturally I can afford an £800 mortgage."

Why you might still get declined: Lenders stress-test mortgages. That £800 mortgage might become £1,200 if rates rise. The lender has to check if you can afford the £1,200, not just the £800. Rent does not carry this interest rate risk, so regular rental payments do not prove you can pass a mortgage stress test.

"I have a 999 Credit Score, why was I rejected?"

Reason: Affordability. You passed the Credit Risk check (you are reliable), but failed the Affordability check (your income isn't high enough for the loan size, or your existing debts are eating up too much of your monthly pay).

"I have no debt, surely that's good?"

Nuance: Having no debt means your "Committed Expenditure" is low, which boosts Affordability. However, if you have never had debt, you may have a "Thin File," making the Credit Risk assessment difficult because there is no track record to judge.

• Gambling Transactions: Regular gambling transactions on bank statements can be flagged as "committed expenditure" or a lifestyle risk, reducing your calculated disposable income even if you never go into debt.
• Buy Now Pay Later (BNPL): Historically invisible, BNPL is increasingly visible on credit files. Lenders are starting to treat these as committed expenditure, reducing the amount you can borrow on a mortgage.
• Student Loans: In the UK, student loans are not "commercial debt" and do not appear on credit files. However, the monthly deduction from your payslip is taken into account for Affordability calculations because it reduces your net take-home pay.

To give yourself the best chance of approval, you must optimise both pillars:

1. Optimise Credit Risk: Pay bills on time, register to vote, keep card utilisation low.
2. Optimise Affordability:
   • Reduce Debt: Pay off loans or credit cards to remove those monthly "committed expenditure" lines.
   • Control Spending: In the 3-6 months before a mortgage application, obtain a tight grip on discretionary spending.
   • Be Accurate: When applying, declare income and expenditure exactly. Discrepancies between your form and your bank statements are a red flag.

• Two Tests: Lenders check both Credit Risk (History) and Affordability (Capacity). You must pass both.
• Income isn't on your file: Your credit score tells lenders nothing about your earnings.
• Stress Tests: Mortgage lenders must check if you can afford payments if rates rise, not just if you can afford them today.
• Debt to Income: Reduce existing monthly commitments to increase your borrowing power.