On a recent ‘no-frills’ flight, I was surprised to hear the announcement over the public address system that airline-branded lottery scratch cards were available to customers.
Surely, I thought, none of the lovely people on my Bridget Jones-style European city ‘mini-break’ could be the kind of people who would indulge in the mathematically defunct pastime of purchasing scratch cards? Erm, well, clearly they were, as hands shot up left, right and centre.
Snobbery and social stereotyping aside, I do think that turning the clock back 10 years would show a different story. Flying has become far cheaper – financially if not environmentally – over the last decade, with the advent of no-frills airlines, and the downward pressure this has placed on established airlines.
This reduction in cost, combined with a stable economy, has allowed more and more people to fly, including those who perhaps 10 years ago wouldn’t have considered planning a Bridget mini-break in some far-flung corner of Europe.
Research shows that the lottery is played primarily by those in D and E social classes, and I think this illustrates how airlines have increased penetration. Clearly, as the prices of perceived luxuries fall, accessibility increases. Logically, if you have saturated certain groups of customers – the wealthy, for instance – to increase penetration, you have to target a different group.
Mortgage similarities
So, what does this have to do with mortgages? Well there are similarities. 10 years ago, mortgages were more aspirational than they are now; 20 years ago that was certainly true. Well-laid government plans to increase home ownership are all well and good, but we need to assess who the increase has – and will – come from.
Historically, you either wanted to own a home or not, and if you did you could either afford to, or not. On this basis, the only method of increasing home ownership was to encourage those who didn’t desire it – which rising property prices has partly achieved – and by facilitating those who wanted to buy but couldn’t afford to.
A relatively benign economic environment, combined with easy access to funds by lenders, allowed more liberal underwriting and more competitive pricing. This, in turn, created access to property ownership for more people – from those in the right-to-buy environment to those with complex underwriting considerations such as the self-employed or those with credit problems.
While this innovation is to be welcomed and I believe that many complex clients are now better served, I think it is important to be careful how far we extend those that perhaps should think twice about buying.
Potential detriment
Returning to airlines, it is fair to say that over the next few years ecological factors may contribute to increased tax disincentives, and therefore cost for air travel. This may well mean that the good times are over for those that can only just access the cheapest flights now – but what potential detriment does this really cause?
By comparison, with tightening criteria which is more accurately priced for risk meaning that more people are falling into more expensive non-conforming classifications, there is a chance that those who until recently couldn’t have secured a mortgage may well fall back into that category again, or will remain able to secure credit but at a notably more expensive rate. While those that haven’t bought will remain unaffected, those that have may well experience significant distress.
As brokers it is crucial that we stress-test clients’ affordability. As recent criteria changes show, remortgaging is not a ‘right’ and those with high loan-to-value mortgages in an environment of flat-lining property prices, or those with adverse history may experience difficulties in raising alternative finance.
MCOB makes it very clear that advisers must assess affordability on both initial pay rates and the reversion rate. But the Key Facts Illustration includes a ‘what if’ section, highlighting the effect of a 1 per cent change in interest rates. Advisers should also be highlighting this, and there is no harm in challenging clients further, encouraging them to stress-test the effect of a 2 per cent or even greater change in interest rates. After all, the client has come to see an adviser, so some creative ‘what if’ challenges are surely the least we can do?
Just say no
One of the most difficult parts of advising is saying no. I’ve heard the excuse many-a-time that “if I didn’t do it, the client would have only gone somewhere else”. That argument didn’t wash then, and certainly doesn’t now. Just because it is possible to facilitate debt doesn’t mean it is right and it is more important than ever that advisers accurately assess affordability, and if a client can’t afford it, that the adviser says so. Clients will appreciate this in the long-run, and advisers will benefit from more robust clients with more respect for the work we do.
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