Beware of trend towards affordability

Brokers should be wary of the implications of lenders moving towards affordability-based calculations when deciding on the loans they will make available, says Frank Eve.

Business in the mortgage market continues to boom. The forecasts of a soft landing or crash have yet to materialise. Instead, the relentless rise in property prices continues to fuel the remortgage, home purchase and buy-to-let markets.

Borrowers have had time to adjust to low interest rates which, although increased by 0.25% recently, appear to present little problem to them. So what is driving the continuing rise in property values? Low interest rates have definitely played their part, coupled with market demand. But to my mind the biggest influence in the market over the past year has been lenders’ attitude to affordability.

As the Financial Services Authority has taken a long look at self-cert, lenders have responded by switching their approach from income multiples or self-cert to affordability.

Intermediaries using affordability calculators have had a pleasant surprise in terms of the amounts clients can borrow. This has had a significant effect, increasing the amount clients are borrowing and fuelling further increases in property values. This potent combination of increases in property values boosting demand and the availability of credit is driving the market.

This change of approach when assessing loans also has implications for technology as most affordability calculations have to be done online using lender websites. Best practice sites can then transfer data to product selection tools and Key Facts Illustration calculations. This is also good news for intermediaries, providing the opportunity of adding value to clients who will not know how much they can borrow and will not have access to the affordability calculators of lenders.

But there are areas of technology that brokers should handle with caution. First, when using lenders’ affordability calculators intermediaries must remember it is their responsibility to ensure that the mortgage is affordable. Just because a lender will offer the loan does not necessarily mean the client can afford the mortgage or that it is in their best interest to take out that mortgage.

The next area to be aware of is hard footprints. Some affordability calculators will lead brokers to a cascade system and finally a decision tool that will give a binding decision. By this time the potential borrower may have had a hard footprint on their credit record and may not be able to get a better offer elsewhere. The pressure is on brokers to give appropriate advice and therefore it is their responsibility to balance the client’s needs with what is available in the market.

From lenders’ point of view, they are accountable to the regulator in respect of making sure they lend responsibly and they have a duty of care in respect of borrowers overstretching themselves. They should not forget this. When I got my first mortgage the income multiple was 2.5 x income less any outgoings for loans. Now we are seeing 6 x income loans via the affordability method. This is all well and good in an environment of stable long-term interest rates, a benign economy and low inflation. Let’s hope this continues and the Bank of England does not have to raise rates again.