Paul Broadhead, head of mortgage policy, Building Societies Association
Haircuts, steak dinners, even bikini waxes. They were all in the firing line as the Mortgage Market Review regime was implemented last year.
The mood music meant you could reasonably have thought that any one of these expenses could result in a borrower being turned down for a mortgage.
The reality, of course, has been very different although there have been instances when a single item of expenditure included in the affordability assessment has resulted in a restricted loan. I am sure every mortgage broker has a story to tell.
The assessment of affordability has been around for years and lenders have always determined their own approach. The difference now is that the FCA rules specify three categories that a lender must assess: committed expenditure (contractual commitments to continue after the mortgage is entered into); basic essential living expenditure (housekeeping, energy costs, council tax and so on; and basic quality-of-living costs (items hard to reduce, such as clothing, household repairs or toiletries).
Clearly an element of judgement is required when assessing what constitutes basic quality-of-living costs, and affordability models vary from lender to lender.
The assessment is affected further now that loan-to-income multiples of 4.5 times or more must amount to no more than 15 per cent of a lender’s mortgage book, irrespective of whether a borrower can afford the loan.
If you add the fact that the new regime is less than a year old and the thematic review of its implementation is yet to be concluded, lenders could be forgiven for acting with an element of caution.
An area that has caused much debate is whether pension contributions should be treated as material for affordability purposes. I suspect the treatment of them varies across the market but, in some cases, they are sizeable and will have an impact on a borrower’s affordability.
In general, lenders have not gone too far. The MMR rules set out minimum requirements and lenders have a right to set their own criteria in accordance with their risk appetite.
As the system beds down and the market improves, it is likely that affordability models will be continually reviewed.
Robert Sinclair, chief executive, Association of Mortgage Intermediaries
Many lenders used to be happy to lend on self-certification of income where the applicant had a good credit score and no adverse credit history. Others used simple income multiples to agree the amount they were prepared to lend.
The great recession and the MMR meant that lenders had to take a new view on how much they would lend. This was despite the fact that arrears and repossessions had been relatively low through the downturn.
Now all lenders must verify an applicant’s income in all cases. There are also new rules on expenditure to assess affordability.
The MMR rules require lenders to take account of the customer’s committed expenditure; their basic essential expenditure and the basic quality-of-living costs of the customer’s household.
Most lenders have interpreted these requirements more rigorously than the FCA set out in the consultation and final rules. The relevant word in these rules is ‘basic’. Taking all actual costs into account and then stress testing the outcomes are steps further than the rules intended.
For Ami, it is clear that costs such as pensions are discretionary and can be flexed at points of financial stress. Unless being relied on for lending into retirement, they should not be taken into account.
From a regulatory policy perspective, it was clear that the FCA wanted lenders to take contractual and essential expenditure into account and then undertake the required stress test.
Notwithstanding this, lenders are entirely within their rights to do what they consider to be right within their own risk appetite. They have to apply criteria that meet their own corporate risk appetite. But they should not try to hide behind the skirts of the FCA nor blame the MMR. If they have decided for commercial prudence to apply stricter criteria, they should have the courage of their convictions and stand fully behind their decision. If this is to improve the quality of their book, a degree of honesty may help.
However, we should not be arguing over this. Instead, lenders should make clear their criteria.
We now live in a predominantly intermediated market and it is essential that the things that differentiate lenders are explicit and published. Ami always argued for more transparency and visibility over criteria and this is still what is required.