The issue of assessing affordability within the sales process and in determining the suitability of products for recommendation has received its fair share of column inches in recent weeks.My former colleague at the Mortgage Code Compliance Board Richard Fox, now chief executive of the Society of Mortgage Professionals, stressed recently at a conference the value to first-time buyers of using affordability measurements rather than simple income multiples when assessing borrowing limits. The application of affordability calculations over salary multiples would increase the size of potential loans in some cases – entirely appropriate in a stable environment of low interest rates. Fox says this would provide a stimulus to the housing market by allowing more first-time buyers to get on the housing ladder. Nationwide, which has used an affordability index for many years, has described the method as much fairer in determining how much to lend. Paul Howard, director of intermediary sales for The Mortgage Works, promotes the use of net monthly income, with allowances for outgoings considered on an individual-case basis, when assessing affordability. There are many affordability assessment techniques providers can employ. These include the stress testing of loans against the possibility of interest rate increases, models of income against expenditure, risk assessment through credit history checks and credit scoring. Such methods allow more flexibility for borrowers and advisers. Despite this, income multiples are the method most commonly referred to in product literature and in the consumer finance press. The popular media are always quick with accusations of irresponsible lending if these historic formulae are seen to be exceeded. It is important to understand what consumers think of the quality of advice and information they receive in relation to affordability issues. Just before the transfer of regulatory responsibilities to the Financial Services Authority last year, the MCCB conducted research into customer perceptions of how affordability was assessed in mortgage sales and found that in most cases the issue was being covered adequately, although sometimes later in the sales process than would seem appropriate. The research also highlighted the need for an update of the simple multiple of salary method of determining what level of mortgage consumers believe a provider will offer. I make no apology for highlighting this year-old research here. Much of its value was sadly lost due to the significant distraction of the run up to Mortgage Day. Nobody has published anything on this scale since, and the issues remain relevant. This is because the research objectives were generic and time-proofed through consultation with MCCB’s stakeholders, including the FSA. NOP World conducted the research on behalf of the MCCB through telephone interviews with customers who had recently taken out mortgages. The survey results indicated customers are aware of personal affordability limits and are satisfied with both the mortgage purchase process and the affordability of their repayments. The results showed that customers do not want to spend more on a mortgage than they can comfortably afford and are increasingly researching their options via the internet before consulting a mortgage company. An analysis of respondents’ income levels against the mortgage taken out revealed generally low levels of income multiple. The research indicated that there is little evidence to suggest that repayments are more difficult to deal with than consumers expected when they were arranging their mortgages, which reflects sensible levels of borrowing and generally good quality advice and information provision in relation to affordability from intermediaries. The issue of mortgage affordability and how companies assess and underwrite mortgage loans will remain an issue for the industry, and a focus of the FSA’s and the media’s attention. Typically, salary multiples are used in promotions because they present a simple and easily understood guide to borrowing. But in practice most providers now use more sophisticated and broader based underwriting processes – including information on a customer’s current earnings and bank details, previous borrowing experience, assessments of potential growth in income, holdings of other financial assets, credit scoring and credit referencing tools – to determine the amount an individual can afford to borrow. A number of providers will offer loans higher than the traditional salary multiples to some customers, and lower to others. To avoid misunderstanding and the risk of publicity adverse to the industry’s reputation from commentators seeking to promote scare stories of over-borrowing and lax control, mortgage firms and their trade bodies should take steps to promote understanding among consumers and the media of the use and value of borrowing criteria based on affordability. This should be a public relations and consumer education priority for the next 12 months. Results of the MCCB survey
A total of 73% of respondents said that their main concern when arranging a mortgage was the ability to afford the repayments, and 86% had an idea of the amount they wished to borrow ahead of arranging their mortgage. Respondents were not influenced in the sales process to raise their expected borrowings. Only 13% indicated that they had borrowed more than they originally had in mind, 61% the same and 11% less. The fact-find process in relation to affordability showed some depth, including information for customers about potential rises in the interest rate and so-called payment shock at the end of special deals. Most respondents who were quoted an income multiple got a figure based on 3 x income with a provision for a joint income. Some 14% were offered a 4 x multiple and only 3% a figure based on 5 x or more. Nearly all were clear about what their mortgage payments would be, while 95% were happy the arranger was not pressing them into a larger loan than they were comfortable with. The research also revealed that 97% were very or fairly comfortable with the level of mortgage they were taking on. Encouragingly, this high level of comfort was matched when respondents were asked how they felt about the amount borrowed after they had been making repayments for a period. Overall 93% were satisfied and 68% very satisfied with the way the arranger dealt with their mortgage.