Expert details solutions to affordability challenges
It is fair to say that the past six months have been a particularly turbulent time for the mortgage industry. Factors ranging from the mini budget, to global events, rising inflation and interest rates have taken a toll on lenders and individuals alike.
While we have seen some sense of stability return among lenders, even with the recent increase in the base rate, the cost of borrowing for households is still higher than in recent years, and a far cry from the rates we witnessed in the pre-pandemic market.
“Lenders are certainly becoming a bit nimbler and more dynamic in their product offering, in response to the evolving market - however, there is still less flexibility for borrowers seeking higher loan-to-values (LTVs),” said Chirag Patel (pictured), product manager at finova.
How to improve housing affordability
With affordability becoming far more challenging in today’s economic climate, Patel believes open banking could play a significant role.
“Open banking can provide in depth insight into the behaviours, trends, and habits of borrowers, taking a much longer-term view to better understand the risk and affordability to improve mortgage approvals,” he said.
In many cases, Patel said there are hidden nuances in a borrower’s financial profile that can be uncovered with open banking’s detailed data insights and comparisons. For example, he said considering an applicant’s savings habits can provide key information on characteristics that might not be typically visible in a bank statement on its own.
“Therefore, the granularity of data and cross-account behaviour can reveal insights that create a greater sense of assurance in affordability,” Patel said.
Additionally, he believes lenders could consider offering more flexible lending criteria, such as higher LTV ratios or longer repayment periods. This could make mortgages more accessible to a wider range of borrowers, including first-time buyers and those with less-than-perfect credit scores.
Additionally, according to the Office for National Statistics (ONS), roughly 1.2 million people have a second job, so Patel said amending the way additional incomes are accounted for could potentially open up opportunities for those with multiple jobs and incomes.
“We have seen a number of our lenders exploring ways to enrich their processes with technology, to not only make better informed affordability decisions, but also product development decisions,” he added.
Patel said there is an appetite among lenders to provide more choice to borrowers, taking into account far more data and factors to improve approval rates.
“Clearly, entering the market now is unquestionably different from just a year ago and there are new challenges for both buyers and sellers to navigate,” he said.
Expectations for housing approvals in 2023
“Looking ahead, we are starting to see some green shoots in the number of mortgage approvals increasing, especially with the Office for Budget Responsibility (OBR) predictions of inflation to progressively reduce over the course of the year,” Patel said.
He expects an improvement in activity in the housing market as a result, and increased stability over a longer period of time.
“We are also seeing more households focussing on savings and reducing existing borrowing, where possible,” Patel said.
In fact, he said, households deposited an additional £1.6 billion with banks and building societies in February 2023, in comparison to £3.3 billion in January, according to the Bank of England.
With these behavioural trends in mind, he believes approvals should increase steadily and cautiously.
“Looking ahead, borrowers may still feel somewhat uncertain in the short term; nonetheless, even in challenging markets, there will always be people who require new homes which should keep the market afloat in the face of adversity,” Patel said.
What do you believe could help improve approval levels for borrowers? Let us know in the comment section below.
