Duncan Berry is director of sales, first mortgages at GE Money Home Lending (GEMHL
In September, the Council of Mortgage Lenders (CML) announced that gross mortgage lending had reached £32.7 billion (in August) – a record high. Yet, despite lending increasing in the marketplace, first-time buyers (FTBs) are still struggling to get onto the property ladder as house prices continue to rise.
A month earlier, FTB income multiples reached their highest level ever at 3.24 times the average income, with mortgage interest payments, as a percentage of their income, increasing to 16.7 per cent. This was intensified by the Bank of England raising interest rates by 0.25 per cent in July – increasing the average for FTB mortgage of £110,000 by around £17.
A key issue
Affordability remains a key issue for the market, and we as lenders need to ensure that the tools are in place to help individuals, and in particular FTBs, to own their own home, while ensuring that the repayments are within their means. As a result of rising house prices and changes in market conditions, we have seen an increasing number of lenders moving away from standard income multiples towards affordability models. This is not only as a consequence of customer demand but also as a result of the feedback of intermediaries, who feel the constraints of conventional income multiple models are preventing people from getting onto the property ladder.
The introduction of affordability calculators is helping FTBs move a step closer towards homeownership. Recent research from Moneyfacts revealed that five of the top 10 lenders are now using such models as opposed to the traditional income multiples method to determine how much a potential borrower can afford.
The advantages of an affordability approach to lending are that providers have the opportunity to be more flexible in the type of mortgages they can offer, as the calculations provide a more accurate account of consumers’ outgoings and disposable income.
This system provides borrowers with enhanced credit facilities and it allows lenders to take each case individually, factoring in the borrower’s existing commitments, such as credit cards and loans. It also offers lenders the option to automate more of the underwriting processes, cutting costs and resulting in lenders being able to handle larger volumes of business.
Within the specialist market itself, lenders have been able to use their expertise and sophisticated underwriting criteria to differentiate themselves from prime lenders. As a result some specialist lenders have seen an increase in demand from prime customers for more flexible products, leading to several non-conforming lenders moving into prime either directly or through pilot schemes with packagers.
On the positive side, as lenders become more experienced and knowledgeable in using affordability calculators, greater confidence and understanding should occur, providing clients with flexible products and a quicker response to their applications due to the automation of processes.
Reducing time and cost
In recent months, we have seen several lenders launching automated valuation models (AVM), which increase the processing speed of applications while reducing the costs to brokers. We launched our AVM pilot last month through a number of our brokers as part of continuous improvement process to making mortgage processes simpler and more cost-effective. Since then, we have seen other lenders announcing the launch of their AVMs to meet market demand.
The industry is having to constantly react to the ever changing needs of borrowers and turning to affordability models as a way of accommodating their needs is just one example of recent developments being undertaken.
The good news for borrowers is that as more lenders look to change their dynamics, they should find it increasingly easier to find suitable mortgage products and subsequently get on to the property ladder.
For many years, non-conforming lenders looked at the bigger picture when considering how much a borrower can afford, taking into account debts and customers’ credit histories.
A rise in the use of affordability calculators should also mean that customers will be borrowing an amount they can afford, thus decreasing the number of people who struggle to meet their mortgage repayments.
Responsible lending
However, questions have been raised as to whether lending larger sums to customers is considered responsible lending. We take responsible lending very seriously, which is reflected in our lending policies. For example, we feel it is important and logical to take into account outstanding secured and unsecured debts that a customer is not consolidating. This reduces the risk of a customer becoming over indebted and gives us a much clearer and accurate picture as to what a customer can really afford to borrow. Of course there is flexibility in this calculation, but, ultimately, it goes some way towards giving a truer picture as to what the customer can afford to borrow and pay back.
The idea of affordability lending is just that, and the applicant’s personal circumstances are taken into account more than before, so they should never be offered more than they can comfortably afford.
There is no reason why we, as mortgage lenders, cannot adapt our products and service proposition to be more flexible. When properly integrated, affordability calculators should lead to a more refined approach to risk analysis and management.
This approach, which more accurately reflects a borrower’s ability to pay, should also enable today’s property owners to move up the housing market ladder, while helping FTBs to take their first steps.
It is up to us to work with brokers, packagers, regulators and customers to develop suitable products and services which meet the growing needs of borrowers who are still struggling against high house prices, which look set to continue to rise for some time yet.
