Bob Hunt is chief executive of Paradigm Mortgage Services
In the lexicon of the mortgage market, and perhaps top of the heap in terms of importance, we definitely find A for Affordability.
As practitioners and active market participants its been interesting to trace affordability, particularly in relation to how advisers explain to clients how they might (or might not) meet the affordability measures of different lenders and what this ultimately means to them.
Undoubtedly, in my mind, the strengthening of affordability requirements under the MMR and subsequently under MCD was vital for the market, and regardless of whether you feel this was over-cooked in practice, it was obvious to all that a return to the pre-credit crunch days was not going to be allowed by our regulators and therefore these measures had to be introduced.
Addressing the new ‘normal’ when it comes to affordability is however not an easy job.
Each month we run a couple of different affordability stress test scenarios for residential borrowers which give a real flavour of how lenders are moving, how rate rises clearly impact on this and perhaps also an idea on appetite to lend and marrying this up with the service proposition.
This, we hope, is helpful to both advisers and perhaps their clients in showing how different lenders approach the market in terms of affordability, and what that can mean, particularly in terms of the size of loan achievable.
However, it could be something of a minefield.
For instance, try explaining to a ‘mortgage prisoner’ sat on an SVR that they can’t have some of the most competitive rates the market has ever seen because they don’t meet the new affordability measures.
They’re unlikely to be very happy, especially if they’ve never missed a payment, and may well be paying considerably less if they were ‘allowed’ to remortgage.
But, as we know, meeting the pre-MMR affordability – indeed the pre-credit crunch affordability – is not the same as doing it in today’s very different marketplace. Perhaps we need some further work in this area to undo such situations?
In that vein, I was also intrigued to read recently a number of articles which highlighted the ‘return of the sub-prime market’ and there’s no doubting that the number of lenders offering credit-impaired mortgages is rising.
In some circles, and I fully understand this, there appears to be some disquiet about a perceived return for sub-prime, especially when we refer to it as just that.
Let’s not beat about the bush here, sub-prime comes with all kinds of negative connotations and this is always going to be the case.
No-one wants another credit crunch but does this mean vanilla mortgages for vanilla borrowers only? I think not and therefore I’m not so sure that we should be ruling out a whole community of borrowers who’ve suffered credit ‘blips’ in their history but are past this and out the other side.
And that’s an interesting point to make around ‘sub-prime’ because I think there is a wider education piece for the industry to grasp here and it’s around the credit-impaired/near prime space, the demand for products, and rather importantly the fact that the provision of such products exists in a post-MMR/MCD environment in which affordability is paramount.
Indeed, as Rob Barnard of Pepper Money recently pointed out, these are products which don’t just require the borrower to meet today’s affordability measures at current rates, but meeting affordability in X years’ time at much higher stress-test rates.
So, while the market still gets to grips with the challenges of affordability, I think we can press the case that the requirements are positive and that’s across any number of sectors which might hold fears for some.
One might hope that having these measures in place provides a degree of confidence to many but certainly to borrowers who, often through no fault of their own and due to certain life events, found themselves in credit issues which they are now beyond.
With affordability at the heart of the mortgage advice and lending process I think we should be able to forge a market, and provide greater choice for those who find themselves in such a situation.
