Affordability is fairer and more flexible

Some could be forgiven for thinking lenders using affordability models rather than traditional income multiples to decide how much people can borrow is a new concept.

The personal finance pages of the national newspapers warn of impending disaster as big lenders – most recently Alliance & Leicester – adopt affordability to assess clients’ borrowing limits. But as brokers and lenders know, affordability has been used by the likes of Halifax, Intelligent Finance, Nationwide and Standard Life Bank for some time and has not led to soaring arrears and repossessions.

In fact IF, which has based its decisions on affordability since it launched just under five years ago, has found the opposite to be true. By not offering blanket income multiples it can look at each application individually, which it says is less risky for it.

Affordability models used by lenders are more sophisticated, flexible and fair than income multiples as they take a borrower’s propensity to pay into consideration, based on their record. Why should someone who has missed payments on every credit and store card they’ve had automatically qualify for a bigger mortgage to let them buy their first home rather than a colleague who may earn slightly less but has never been in arrears?

Melanie Bien, associate director at Savills Private Finance, says affordability is a more sensible approach. “The lender looks at the borrower’s overall financial position and not just their income,” she says. “Factors such as dependents, their credit score and demands on their cash are all considered. For example, if two people earning the same amount apply for a mortgage but one had three children, the childless applicant will have less demand on their cash.”

Though calculating by affordability rather than income often lets borrowers take out bigger mortgages, this is not always the case.

“With affordability, lenders assess how borrowers are likely to cope with payments. This isn’t just about bigger mortgages,” Bien adds.

Lenders that use affordability say it’s about treating people as individuals. They get criticised for not helping first-time buyers or people on lower incomes onto the housing ladder, but when they try to be flexible they are slapped down. Some may feel trapped in a a no-win situation.

Though lenders can get it wrong, anything that takes a personalised approach is welcome. The use of affordability is not new and rather than accusing lenders of being irresponsible for using it, more should be encouraged to adopt it.rosemarygallagher