I wouldn’t claim to be an ardent follower of public affairs, but I see and hear enough of the national news to know that education is one of the hottest topics on the agenda of all the political parties. I’m also not about to tie my colours to a political mast, but I do think that education is important. The reason I think education is important is that it is all about communication and, without this, it is difficult to justify why you expect people to understand things you feel they ought to.
Last week, I was chatting to a friend of mine who is thinking about buying a house. He was down in the dumps because he had seen a house he wanted to buy but the amount he needed to borrow was approximately 4.5 times his annual income. In his view, this meant it was out of his reach. I was amazed, as I know that numerous lenders are now offering affordability-based underwriting that enables people to borrow five times income and beyond. In the not-too-distant past, these lenders were in the minority, but in 2006 affordability has become the norm.
I was surprised my friend felt he was in such a poor position as I have only recently bought a house myself and had, quite quickly, drawn up a shortlist of lenders who operated on an affordability basis. After a brief period of reflection, I realised why he felt this way – it was because nobody had told him otherwise. I looked through some recent copies of consumer mortgage magazines and found no mention of affordability-based underwriting. I did find many adverts explaining why lenders were bigger and better than their competitors, but very few explaining why. I also found best-buy tables sourced from well-known data providers, but these almost always listed income multiples, many of which were capped at 3.5 times income.
Nowhere did it say that the amount someone could borrow would be based on what they could afford. I sat scratching my head wondering why lenders were missing out on such an obvious marketing opportunity. I still don’t know why.
The future of underwriting
If you look through the intermediary mortgage press, it is a different story. In the news articles and in the adverts you will see lenders talking about affordability. It is blatantly clear (and universally accepted) that this is the future of mortgage underwriting. Fantastic, and great news for borrowers, but don’t you think we ought to tell them? My point this month is quite simple: if lenders and intermediaries don’t tell the general public that they can have their mortgage application assessed and judged on the basis of affordability, then who exactly do they expect to do this for them?
Make no mistake, this is not a minor issue. I’ve even got the facts to prove it. In September 2005 Mortgages plc piloted affordability-based underwriting with a number of our leading distributors. Immediately our lending volumes increased, but at the same time we saw our self-certification business reduce by 15 per cent. The reason this happened was simple – we had offered an alternative to self-certification for employed clients and they had decided that this was the right option for them. The only reason they knew about this was because it had been communicated to them by mortgage advisers – otherwise they would have had no idea.
Too busy
In the busy modern world, it is unreasonable to expect people to gain knowledge by proactively looking for it. Some people will always be inquisitive, but most have a busy life to lead and will only take notice when something is promoted to them and catches their eye. When it comes to learning new things upon which their life does not depend, people become lazy. For example, how many people would remember to pay the London Congestion Charge if there were not large red signs at every entry point to the Congestion Zone? Very few I expect. Similarly, how many people applying for a mortgage can you expect to realise that their application could be assessed on affordability if you do not put something in front of them to explain this? You don’t need me to give you the answer to that one.
Spread the news
Next time you are promoting your services to your client base, make sure you tell them what they won’t necessarily know. Everyone knows that mortgage intermediaries claim they can offer good advice and a stress-free application process, but how many potential clients are you losing because they do not think they can afford the mortgage they really want? Affordability-based underwriting is taking the mortgage market by storm, so make sure you let your clients know about it.
