In response, lenders have recognised the importance of affordability and identified it as a key way to stand out from their competitors.
As a consequence, in the last year alone, at Mortgage Broker Tools, we saw over 1,000 changes to lender affordability calculators and a number of emerging affordability themes that we have recently covered in a review of 2021. So, what trends do we expect to see next year? Here are the top five affordability trends to look out for in 2022.
The number of affordability changes will only increase
Rates have historically been the main lever for lenders to pull in order to attract new business volumes, but it squeezes margins that are already tight.
We’ve lived through an ultra low-rate environment for some time now and, while more rate increases are expected, the Omicron variant highlighted the continued risk to economic recovery and any rises are likely to be slow and measured.
So, lenders are unlikely to have much wriggle room on rates for quite some time and will need to be more creative in order to meet their targets.
Affordability is fast becoming a popular way for lenders to stand out from the competition.
Specialist niches on the rise
Over the course of the last year, we’ve noticed an emerging theme with construction industry scheme (CIS), umbrella companies and joint borrower sole proprietor products. More lenders are offering specialist solutions and they calculate affordability in different ways, which means a significant divergence in the loan amount that could be achieved.
When it comes to contractors earning their income through the CIS, there are now 10 of the top 43 lenders that will take the gross weekly wage as if the applicant was employed, rather than the net profit figure.
This can make a big difference to the loan amount achieved by the borrower. For example, for an electrician earning £225 per day the difference in the maximum loan available could be as much as £85,000.
Growing number of specialist BTL lenders
Holiday lets were naturally a popular investment for buy-to-let landlords in 2021 as the pandemic made international travel a challenge.
It’s likely that the trend for staycations will continue even beyond the pandemic as people become more conscious of their carbon footprint and the range of available domestic properties for a short stay improves.
Similarly, there has been no let-up in tenant demand for houses in multiple occupation (HMOs) as a source of affordable housing and buy-to-let investors are increasingly looking to these more complex forms of investment as a way of achieving a stronger yield.
Lenders have responded, with new entrants and products in this part of the market and this is only expected to continue.
Affordability will be a key battle ground for lenders. Analysis of real cases processed through the MBT research platform shows that, in the first 10 months of 2021, the difference between the average minimum and maximum loans available to an HMO investor was £295,636 versus £237,265 for a holiday let.
Comprehensive research across the whole market is hugely important in these niche areas and it will become more vital as new entrants enter the market and enhance their propositions.
Later life lending takes a more central role
By 2030, more than one in five people will be aged 65 or over, according to Age UK, and many of these will have outstanding mortgage debt.
Demographics dictate that later life lending is going to become a more prominent part of your offering and lenders are working on ways to offer affordable, sustainable loans that meet these requirements.
Borrowers in this age group typically get £66,000 less than the rest of the market. Affordability for later life lending is often constricted by term lengths and retirement ages, despite the fact that they generally have higher earnings.
We know that this is on the “watchlist” for a lot of lenders, so watch this space.
Alternative lending options to stretch affordability
As property prices continue to grow faster than income, lenders are considering more creative ways to enable borrowers to achieve the loan amount they need to reach their goals.
This year, we expect to see the launch of long-term fixed rates amongst other alternatives.
We expect a combination of lender innovation and increased adoption of technology by brokers will lead to an increase in the use of alternative lending approaches to stretch affordability. So, expect to see even more affordability changes in 2022.
