Affordability calculations should be more transparent

From Colin Snowdon

I read with interest Richard Griffiths’ column entitled ‘Lenders’ window of opportunity’ (Mortgage Strategy November 28), in which he says lenders should make their affordability calculations available to sourcing systems.

I agree wholeheartedly. In fact, I would go a step further and say lenders not only need to make clear to sourcing systems how their affordability calculations work, but they should also ensure their systems are transparent as far as brokers are concerned.

Unfortunately, some lenders have adopted a ‘black box’ approach to affordability calculators whereby brokers have either to use an online system or phone a call centre. In these instances it is not clear to either the broker or their client how the maximum loan amount has been arrived at.

The feedback we have received at Freedom Lending is that this causes frustration and leaves brokers concerned about recommending solutions which cannot be fully explained to their clients. This is why we adopted a transparent approach to the way our affordability calculator works.

Like all effective ideas, it is simplicity itself. The broker calculates 30% of the applicant’s combined gross annual income. The borrower’s annualised commitments (e.g. retained loans and maintenance payments) are then deducted from this figure and whatever is left is divided by the standard interest rate for the product chosen. And so a supportable mortgage figure is produced.

So if applicant 1 earns 30,000 and applicant 2 20,000, this gives a combined gross annual income of 50,000. 30% of this figure is 15,000. If the applicants’ annualised commitments amount to 3,600 this gives 11,400 which, when divided by the chosen mortgage rate, say 6.49%, results in a supportable mortgage of 175,654.

There is no good reason lenders should keep their affordability calculations such a closely guarded secret. Transparency is good news for brokers, borrowers and lenders.