The classic 2.4 children, Oxo cube family may have disappeared somewhat over the last couple of decades, but the needs of families to obtain adequate funding to buy that dream home are still the same.
With the continuing shift from income multiples to affordability models, mortgage lenders are aiming to meet the needs of borrowers facing ever-increasing house prices versus salaries that just can’t keep up.
Yet, does this work for a family, with the added expense of children to take into consideration alongside mortgage repayments, compared to a couple with no children?
Dependents
For Thomas Reeh, chief executive of blackandwhite.co.uk, affordability models are by far the best way for a lender to judge a person’s borrowing capability. “Affordability models are more sophisticated than income multiples and the chances are that borrowers will get loaned a higher amount. Where income multiples fall down is on larger numbers. If you have enough surplus income, then income multiples become irrelevant.
“I don’t know any mortgage lenders that do not take having children into account. What is classed as a dependent differs from lender to lender, and if one parent is not working, it will impact how much they can borrow. Yet from a broker’s point of view you want as much flexibility as possible, but you don’t want the customer to bite off more than they can chew.”
Ray Boulger, senior technical adviser at John Charcol, agrees affordability is better for families, despite the fact that a family on one income could be seen as a greater risk than a singleton.
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He explains: “A couple would borrow less if they were on the same income level as a couple without children, but the degree to how much less is quite small. The fact is, using affordability, people can often still borrow a lot more than on the old income multiples. With the old system, the joint multiple is always less, while with affordability the joint is normally the same.
“It doesn’t benefit families as much as a single person or a couple without a child, but what affordability based lending is meant to achieve is taking a much more individual approach to mortgage lending.”
However, Boulger points out that affordability models don’t help those on a lower income of around £15,000-20,000, and can actually be a hindrance. “Affordability models help those on a higher income more than those on a lower income. People on lower incomes may not be able to borrow as much and income multiples might actually help them more. But it’s difficult to be specific because different lenders have different affordability bases.”
Transparency
Colin Snowdon, chief executive of Freedom Lending, believes that transparency is essential for affordability models. He says: “Many lenders use ‘black box’ systems, where a broker doesn’t know the determining factors. Brokers can get a feel for a system, but they won’t know the determining factors. We believe the way forward is transparent affordability. Lenders have to have as much clarity in their business as possible for brokers.”
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Snowdon adds: “If you have children and one parent not working, then we will lend less because there is less gross income. However, the key to our affordability is whether you have long-term credit, not whether you have dependents. A couple with no credit or maintenance will be able to borrow more for their mortgage.
“If a broker is looking at how much they can get for their client, there will be winners and losers in affordability calculators, the same as there will be with income multiples. Part of the broker’s job is to know which option is best.”
Important initial guide
However, Rob Procter, deputy chief executive of Kent Reliance Building Society, defends income multiples as an important initial guide for brokers and clients, as it is a simple calculation. He explains: “Ultimately, affordability will give a better rounded figure, but the initial thing is to know what you can afford and some people have used affordability to stretch income multiples without thinking of the consequences.
“Sometimes income multiples do work better for families. They have to accept they have more potential outgoings than couples and borrowers have to take personal responsibility. They will be doing themselves no favours by stretching their affordability or not declaring all their financial commitments.
“Affordability is more accurate in the long term but income multiples have proven to be a good guide that people want.”
Income multiples are so ingrained in peoples’ minds that they are unlikely to disappear completely, purely on the basis that they are such a simple calculation. By comparison, affordability models are generally an unknown quantity for the borrower, requiring a much more detailed approach.
Yet, whether one option is better than the other for a client or a family comes down to personal circumstances. Families may face greater outgoings than a couple without children, but lifestyle must also be taken into consideration – just because a couple does not have children does not mean they have fewer outgoings. But affordability is still a great help. While not necessarily for all, it has gone a long way to meeting the increasing financial needs of today’s potential home buyers.
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