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Leeds to abandon income multiples

Leeds Building Society is to change the way it assesses how much to lend to customers in a move that will see it abandon income multiples.

From April 16, Leeds will only accept applications using its new affordability calculator.

It will take into account income, other financial commitments and average household expenditure figures, provided by the Office for National Statistics, to reach a decision on the maximum loan amount.

Decision in principles based on income multiples offered up to and including April 13 will be accepted as long as the full application is made before close of business on April 20.

However, Leeds’ website will be temporarily unavailable on April 14 and 15 while it updates its systems to accommodate the change.

Buy-to-let applications are not affected by the change and these applications will continue to be assessed on rental income.

As part of its final mortgage market review consultation paper, published in December, the FSA included a proposal which means lenders must ensure they take into account basic living costs and other loan commitments when assessing whether to advance credit. Leeds says its decision was not influenced by the FSA’s affordability proposals as part of the MMR.

Jonathan Clark, mortgage partner at Chadney Bulgin, says: “Affordability calculators are a much more sophisticated way of working out whether a customer can afford their loan. And with the MMR stating lenders should assess affordability when lending, it is inevitable lenders will start to change the way they do things.”

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  • Tom Cleary 13th April 2012 at 11:57 am

    Good posts and sensible balanced arguments. However, affordability calculators are income multiples by any other name. You can still factor in credit commitmens and apply income multiples as was the case prior to affordabilty software. And multiples have always sat behind these models as a cap. I have never seen an affordabilty calculator throw out eight times joint income as a result!?

  • GHU 12th April 2012 at 4:18 pm

    To Bald Underwriter – nicely rationalised argument. I still have reservations about these computer based models but if they can be made transparent and aren’t easily manipulated by ill informed CEOs I do accept your argument.

  • Bald underwriter 12th April 2012 at 2:21 pm

    The argument between multipliers and affordability models has always been an interesting one and as is so often the case there isn’t a black and white answer. Income multipliers can work well, but only on the proviso that they are set at an appropriate level and the lender has ways to deal with ‘outlier’ customers who may not be adequately assessed in that way. (e.g. those on very low incomes, those with a large dependent family or those taking a short C&I repayment term).

    Some of these risks can be mitigated by additional criteria, for example tiered multipliers by term or minimum incomes but the family unit size is less easy to reflect though multipliers and is arguably the biggest risk in terms of true affordability.

    Affordability models, whilst lacking complete transparency do at least try and take more of a real world view, provided the modelling behind it stands up to scrutiny. My experience of the early use of affordability in the noughties by competitors was that they were used to lend more than was normally acceptable under multipliers, but somehow by including the word ‘affordability’ into the name it all looked very responsible and laudable. Truth was, however, that behind the scenes living expenses, stress testing and contingency margins were all pared to the bone.

    I do agree that there is a danger that lenders can regulate volumes though adjustments to the models but lenders should have good governance around such changes and the FSA will review the basis of the models within their supervisory visits; so beware the lender who relaxes the model to court more business without sound rationale.

    So in essence, multipliers have served some lenders pretty well, but only they can’t be genuinely defended as always being accurate alone and a good, well reasoned affordability model should produce more robust decisions. (And with a good old fashioned experienced underwriter in tow even better ones!)

  • John 11th April 2012 at 3:42 pm

    Ive never been convinced of income multiples!

    I have always had massive amount of affordability but always fell down on multiples – never really stacked up.

    Its always felt like I was being penalised for not taking on debt. The affordability stacked but computer said no due to income multiples.

    I just hope they have factored in a check to ensure that affordability remains after an uplift in interest rates.

    However its reassuring that a mainstream lender is being a little more innovative in terms of their approach.

  • GHU 11th April 2012 at 10:45 am

    I’ve never been convinced by affordability calcualtions as they are not transparent. To me it is like adding another tier into credit scoring and is subject to the same degree of manipulation. I know multipliers are old fashioned and in some ways anachronistic but most Building Societies have used them successfully for decades. It was mainly the larger lenders who tried to automate their entire systems that actually disappeared from the market place and many of those had an affordability calculator. If it ain’t broke….!

  • Rob hayes 11th April 2012 at 9:57 am

    A good move.Gross Income mulitples are a crude method of assessing loan affordability whilst a genuine assessment of net income is more accurate. Like most systematised approaches, though, the quality depends on the accuracy of the inputs. It is not the sole determinant of acceptability and lenders capable of applying sound judgement will always have an advantage.

  • Stuart Duncan 11th April 2012 at 9:51 am

    It is a shame that lenders are not tempering their changes by referring to the latest MMR paper instead of the previous one, whose negative impact alone demonstrates how poor it was.

    I am very much against the one size fits all approach and there are circumstances where income multiples are more helpful (e.g. when one member of a couple cannot go on the mortgage for whatever reason).