Traditionally, income multiples have been used as the key criteria for lending in order to establish the loan size that a borrower can comfortably repay, therefore minimising the risk of default. However, as housing prices continue to rise, many consumers have been left to wonder why lenders should doubt their ability to pay the same in mortgage repayments as they have done in rent. This perfectly reasonable question (coupled with a period of stable interest rates and the realisation that with current house prices still rising, property ownership could become even more difficult for first-time buyers (FTBs)) has led to mortgage lenders beginning to look at a different model to assess the ‘affordability’ of the loan.
Natural progression
A customer with no credit problems in their recent history who has been paying rent of £600 a month for a number of years, might also happily turn this to repayments of a mortgage regardless of their salary level. Therefore it is a natural progression for high-street lenders to start moving their lending criteria from income multiples to this new affordability model. By making this move, in addition to attracting a wider range of customers, including those who could never dream of owning a home under traditional criteria, the lender also has the additional advantage of being seen to help FTBs on to the property ladder. Property has become far out of reach for the average FTB on the average salary, and it is in the lenders’ interest to make sure that new borrowers continue to join the market on an ongoing basis.
But what of the non-standard mortgage? Can it really be considered in this manner? Or is affordability strictly a ‘mainstream’ product? Until recently, the answer to these questions would have been a resounding yes. However, this is changing. We recently dropped income multiples completely in favour of lending based solely on affordability. With the non-conforming market this is a slightly different calculation, as sensible levels of debt repayment must also be taken into consideration alongside the mortgage repayment. However, the principles remain the same. We have found that affordability works well in this environment – well enough to give up using income multiples to calculate the loan amount altogether. Unlike income multiples, affordability takes into account the customer’s ongoing liabilities, therefore giving a much more robust assessment of how much they can realistically afford to borrow for their mortgage.
Fair and efficient
Calculating an individual’s affordability level is a much fairer and more efficient way of determining someone’s ability to repay, rather than using an income multiple formula that doesn’t take lifestyle, fixed outgoings and existing debt into account. Mortgage intermediaries might express concern that affordability levels aren’t as quick and easy to process as a simple calculation, but most lenders now offer an online affordability calculator that determines how much an individual can borrow in just a few minutes. As more non-conforming lenders embrace the idea of lending according to affordability criteria, the FTB market will open up to the non-confirming sector. This will be hugely beneficial not only to intermediaries who wish to offer a wider choice of products to their customers, but also to the numerous potential home owners who don’t have a spotless credit history.
What all this means in practicality to the customer is that for the first time in many years there is a way to extend their reach onto the property ladder. The last change of this significance was back in the 1970s, when lenders first began to consider joint incomes on mortgage applications, rather than a single income of the main breadwinner.
Positive news
The immediate impact of the affordability model is great news for the customer. This lending model means that property is becoming more affordable to individuals who might have previously thought it was out of their reach. FTBs have started to return to the market, which in turn is great news for the industry as a whole. However, there is a caveat.
The impact of wider access to increased borrowing potential could further inflate the housing market. House prices continuing to rise may not seem to be an issue to the industry now, but it is likely to develop into one in the future. Even if house prices rise significantly without any bubble bursting effect, the obvious result of continued growth in property prices is that FTBs may eventually find they are once again priced out of the market. Lenders will again find themselves looking round for that elusive FTB.
In the meantime, mortgage intermediaries and customers alike should make the most of the positive impact of the market’s recent move to affordability based lending.
