A question on the lips of every lender, intermediary, consumer champion, regulator, and journalist. But what about the borrower?
If you believe the recent investigations into the non conforming market were a true representation of the market, one would get the impression that the last person who worries about whether the payments are affordable is the borrower.
Perhaps a quick dose of Nicolas Nickleby and the Micawber principle would be a useful prompt to the customer. However life’s not like that and neither is the outlook of the majority of borrowers.
As we all know even if the customer should be in the best position to be able to judge whether they can afford the level of borrowing they desire, it is quite a difficult and complex concept for them to pin down. That’s why FSA are right in insisting that both the intermediary and the lender are both separately responsible for ensuring that a responsible approach to lending is undertaken.
For me, it is interesting that when writing MCOB, the regulator didn’t call this principle ‘responsible borrowing’ - as if the customer does not play any part in their own responsibilities!
CML have also made it very clear to their members that they must conduct their own affordability tests, particularly since the recent sub-prime thematic work that FSA have reported on which highlighted that neither intermediary nor lender can rely solely on one another’s affordability checks.
Although in the right circumstances it is appropriate for lenders to obtain written conformation from an intermediary that affordability has been checked, it cannot delegate its own responsibilities onto a third party. Again the CML have issued guidance to their members on this very point.
Anyway the simple fact is a client either can or cannot afford their loan. The tricky bit is knowing precisely where the tipping point is in the future.
Personally I have always been more in favour of affordability models than arbitrary multiples of income. Let’s face it, it’s not what you earn, but what you spend that determines whether you can afford your mortgage repayments. The only person that can determine how much they are going to spend in the future is the client. No mortgage intermediary or lender’s underwriter can ever predict this variable accurately. They can have a serious chat with their client about budgeting though, and under FSA’s responsible lending principles they should.
And there is no harm when pointing this out to clients, in reminding them that by cutting down on the superfluous (the ubiquitous full Sky package or the under/unused David Lloyd membership) they may increase their borrowing power up front. Some may think me saying this is promoting irresponsible lending.
Well I would rather have an intelligent conversation about the client’s responsibilities than blindly fulfil a client’s request for ‘one of those self cert mortgages please’. Consumer demand for credit has been at its all time high and it will be interesting to see if this current climate starts to naturally curb it. However whilst house prices are at their current level compared to earnings there will be demand to borrow as much as affordably possible.
So if one aspect of judging whether a client can afford to make the repayments in the future is what they spend, then the other is what the repayments will be. This is altogether much easier to establish but not completely free from interpretation.
After all, it is impossible to predict over a twenty-five year term whether any client would or would not experience payment shock (or severe over-affordability for that matter, with the effect of inflation over that period of time – no one ever mentions that one do they!). However it can only be reasonable to ‘stress test’ a client’s affordability of the loan at the revert-to rate rather than the initial pay rate.
After all they are about to sign a contract which states upfront what the reversion rate will be. Even if they are intending to refinance after the initial rate period no one can guarantee that a refinance option will be available. Look at the retraction from certain kinds of risk over the last few weeks.
Anyone who missed a couple of credit card payments four months ago, whose two year fixed rate is up next month may not be in a position to refinance it or even get a retention rate from their existing lender. Also, there seems to have been quite a lot of second charge lending entering the market over the last five years. This too could curtail the refinance of an initial low rate.
So can they afford it? Well it’s up to us all to make sure they can.
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