On the face of it, this client is taking an ambitious approach in wanting to buy the property they have perhaps set their heart on. Assuming an employed income of £30,000 they are looking for an income multiple of seven times, which must beg the question of affordability, despite their apparent confidence that they can meet the payments.
If there is other secondary income or this client is self-employed with a greater actual income than declared, there may be less concern in self-certifying an income which would need to double to fit traditional calculations. Similarly, if they are sure that because of their profession they could expect a significant increase in income, that might justify a self-certification of more than £30,000.
An alternative would be to look to a lender such as GMAC RFC, where it is not necessary to enter an income on the application but simply make a statement confirming affordability. Initial payment rates are generally no different than normal self-certification schemes and this could avoid making a false statement but still making a genuine confirmation of affordability.
Affordability in relation to self-certification is beginning to exercise the minds of lenders. The tried and tested method of income multiples is not always appropriate when judging ability to pay but has generally stood the test of time and varying economic conditions. Using a calculation based on disposable income, taking into account regular commitments, is a justifiable alternative but demands a more individual and detailed assessment of circumstances.
If the client is a first-time buyer, they may consider the innovative 1st Start scheme launched by Bank of Ireland Mortgages where the loan amount is calculated at parental income less their mortgage commitment multiplied by four, then plus once the applicant’s income. In this instance, net parental income of £45,000 would do the trick.
The first place to start will be with a detailed fact find surrounding the client’s financial situation. This process will look at the client’s current outgoings including any current secured and unsecured lending monthly payments. This particular client seems confident that they can manage the payments on this mortgage. But can they? In reality this is a seven times income multiple.
We do not know if the client is employed or self-employed. The self-employed borrower will tend to have a variable cash flow, very different from the employed borrower. Should the client be a graduate with an excellent professional career ahead, then rapid salary rises would certainly be on the cards, which will improve the client’s situation.
The client does not really have self-certification options as there are potential dangers down that road. At what point does the lending become irresponsible? The level of income multiple required would be considered some way outside what many would consider responsible.
Consider also that with interest rates at a 50-year low, no lender would want any borrower to over-stretch themselves. The next move in interest rates is likely to be upwards with rates peaking at around 5% in 2004/2005. And a recent CML report, suggested that if interest rates were to double it would increase a household’s outgoings by 29%.
Last month saw the launch of an innovative high income multiple product. This product ‘tops up’ the income multiple by using a parents income. However, the parent’s outstanding mortgage liabilities will be deducted. The maximum LTV on the product is 95%. As far as rates are concerned there are a three-year fixed rate at 4.89% and a five-year fixed rate at 5.29%.
Should the client not have the parent option available there are very few other options.
Based on the information provided, it is essential to begin with that a client states their correct income on a mortgage application so that the lender can assess the application responsibly.
Our lending criteria is based on the applicants’ ability to afford the monthly mortgage repayments, so we need to ensure that we have the correct information on which to base any decision.
This client is looking to borrow a large amount of money compared with their income. Based on an interest rate of 4.5%, their monthly mortgage repayment would be around £1,160. This would need to come out of their take home pay of £1,855.
Any responsible lender would need to ensure that they could afford this monthly repayment alongside their other commitments and general living expenses. This affordability can be ascertained in a number of ways, such as completion of an income and expenditure statement. This takes into account the new mortgage and associated housing costs as well as living expenses. If affordable, it should demonstrate an excess of income over expenditure.
Another check would be to see if the client is currently renting a property, or has an existing smaller mortgage and is saving on a regular basis, and the combined amounts are roughly equal to the new mortgage. If so, then this too is a good indicator of affordability. It is also important that any current or future credit commitments are properly considered.
The client must also consider how they would manage if interest rates were to rise or if they were faced with an unexpected bill. If the lender and the client are satisfied that the mortgage is affordable then it would be worth considering an interest rate which is fixed for a period to protect against any interest rate rises.