Gary Salter is Nationwide’s head of corporate accounts
The way mortgages are approved by lenders continues to evolve, and perhaps no more so than in the area of affordability.
There have been big changes in the information lenders require - gone are the days when all a broker had to do to satisfy a lender was make the application fit into a three plus one income multiplier and provide just enough detail to underwrite the loan.
Many of the latest changes stem from the new regulatory environment and these will continue to evolve as the landscape changes.
Under the Mortgage Market Review, lenders will be responsible for affordability both at the time of underwriting and also the future sustainability of the loan.
The future sustainability aspect is likely to suit lenders, not least because it is one way of ensuring they only lend to borrowers who can afford to repay the lender - hence reducing a potential risk of having to repossess a borrower’s home further down the line if they default on their loan.
The new regime also means lenders will need to know much more about the borrower taking out the debt. For example, they will need information about the sustainability of the applicant’s employment and further details about their personal circumstances. This will include things such as affordability during maternity leave, whether the borrower is likely to relocate with their work and perhaps rent out the mortgaged property.
Currently, if an applicant says they earn £100,000, they will need to prove this, but where the total income includes overtime, bonues and shift allowances, lenders will need to understand how sustainable the additional income is likely to be to allow them to accurately underwrite the loan. And lenders will need to look closely at the lifestyle of applicants, particularly where they have children.
We sometimes see examples of applicants with children where both parents work full time, but no child care costs are declared. In these situations, lenders will use plausibility measures to ensure the mortgage is sustainable.
There is likely to be a change in emphasis from the current situation where, provided an application ticks all the boxes around criteria and credit score, the lender will approve the loan to one where even if the loan appears to be inside policy, additional questions will be asked.
Overall, there will be a much greater focus on proving living costs and whether it is appropriate that the borrower takes on the loan – ie. does it match their customer circumstances and can they afford it.
One of the key documents in this process is the fact find, carried out by brokers. The accuracy of the information collected on this document will be critical, both from a compliance viewpoint but also when submitting applications to lenders. The importance of knowing your customer will become ever more critical and from a lenders perspective, an application submitted with absolute clarity around plausibility will be much more attractive than one with gaps in the information requiring a number of back and forth conversations.
To this extent, it will be important for brokers to choose their lender accurately and to know what is required, based on published criteria. There is always likely to be a challenge around knowing different lenders criteria, but compared to 2007 when there were significantly more lenders in the market, this will be less of an issue.
There are likely to be many similarities around what lenders require to evidence affordability, particularly around proof of income and bank statements and as is the case now, it is fairly easy to anticipate the documentation you will be asked to provide as you complete the fact find with the customer.
So in a post MMR world, the buzz word for many brokers and lenders is going to be plausibility and those who get on board will see their business go from strength to strength.
