Networks and lenders have been carrying out extensive training to get the industry ready for a new era of forensic customer assessments.
They are designed to force borrowers to consider the reality of their spending habits rather than a superficial box ticking exercise of what they would like them to be.
Personal Touch Financial Services invited Mortgage Solutions to one of its broker MMR-training session where Neil Hoare, head of commercial relationships, dissected bank statements as an underwriter would.
While the responsibility for assessing the applicant’s affordability rests with the lender it is better to avoid a frustrating game of ping pong with your underwriter.
In the first of two-part feature PTFS reveals how an underwriter tackles bank statement assessments.
PTFS’ tips on bank statement assessments
Regular annual spending
Be prepared to push customers on their spending over birthdays, holidays and Christmas.
These are permanent expenses which must be be broken down into a monthly spend and included on the application form as if they were saving for the events on a monthly basis.
These are areas of spending where borrowers are often forced to go overdrawn or use a credit card which they cannot afford to pay off.
Holidays fall into this category too. Question applicants on how they will pay for their annual holiday.
Bank statements may reveal travel insurance payments or spending abroad which will throw into question an applicant’s insistence they don’t go on holiday.
Erratic and frequent cash withdrawals
A succession of cash withdrawals staggered throughout the same evening, for example on a Friday night, suggest a lack of discipline over spending.
And while this may not be a reason on its own to knock back the mortgage it could be helping to build a picture of erratic or irresponsible spending behaviour.
If the withdrawals cause the applicant’s other bills to bounce it will not bode well for the applicant’s chance of getting approved.
Vices
There will probably be space on the application form for tobacco or alcohol spending.
Check what the applicant is telling you against pub debit card payments. Particularly high pub spending one month may be due to a one-off event.
If this is apparent by comparing spending on the other two months then it would be plausible to use an average and explain why.
Gambling is a different story. Payments to gambling outlets will not be viewed positively, particularly if they are frequent.
Do not fall into the trap of thinking any wins will be taken into consideration.
Despite your applicant’s insistence they have ‘foolproof system’ your underwriter will not share the same view. Frequent gambling suggests a lack of self-control.
Unusual or non-descript regular transactions
Magazine or newspaper subscriptions, lottery payments, hobby memberships, union subs, pet insurance, gym membership and insurance for appliances may not fit neatly into the boxes on an application form.
If it is not completely clear where these payments have been added include a note at the back of the application to clarify where they have been included.
It is important to consider if any of these direct debits have related regular costs associated with them for example pet food if there is pet insurance.
Some direct debits may not be indicative of the product or service they are paying for.
Some gym memberships look like payments for council tax if the gym is run by the local authority. Help the underwriter out by adding a line of clarification.
Paypal payments can be a red herring as they show up as direct debit transaction.
Payments out to another account may indicate the applicant has another account which they have not disclosed to you.
Informal sources of income
Is the applicant receiving regular deposits from a source which is not their employment? The source could be a parent.
Check to see if the bank account is being propped up by these deposits which would indicate the applicant is unable to maintain their lifestyle based on their own salary.
The regular transfers may indicate the applicant may have another account they have not disclosed to you.
Plausibility of outgoings and the inclusion of plausibility statements
Some lenders are using average spending habits based figures from the Office of National Statistics as plausibility indicators regardless of what figures are entered into the affordability calculator.
Carry out a sense check when your applicant discloses their outgoings. Is a family of five spending £30 a month on electricity realistic?
Where the monthly spend on a particular item is lower than average include a plausibility explanation with the reason why.
Familiarise yourself with the ONS figures – do not use them instead of your applicant’s outgoings but use them as your own plausibility indicator if preferred.
For the ONS average household outgoings click HERE.
