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Consultations and cost of living; the opposing forces on affordability – Toumadj

by: Tanya Toumadj, CEO of Mortgage Broker Tools
  • 13/05/2022
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Consultations and cost of living; the opposing forces on affordability – Toumadj
The Bank of England (BoE) has just wrapped up its consultation on removing its three per cent stress affordability stress test.

 

Across the mortgage community, the ruling is expected to pass, after which lenders will have the freedom to set their own reasonable rate. 

BoE estimates that this change will allow six per cent of borrowers to get the loan they wanted. This could also open the door for a more bespoke data-driven approach to affordability that takes into account the fact that buyers are unique. 

However, there remains a question about whether the regulator should review its loan-to-income (LTI) flow cap, which currently stands at 15 per cent at or above 4.5 times LTI.  

Habito and Perenna have already made a statement to say the current limit is not ‘fit for purpose’ and it’s likely that other organisations will also call for more action.  

There is definitely borrower-led demand as 40 per cent of Mortgage Broker Tools (MBT) searches are for an LTI of 4.5 or greater. At the moment, a borrower looking to buy a £250,000 home, with a 15 per cent deposit and a salary of £35,000, needs an LTI of 6.1.  

 

Cost of living risk 

These may be positive signs, but they are being offset by the increased cost of living, which will lower borrower’s affordability and will have a disproportionate impact on lower earners, who will struggle the most to buy their own home. We will see this impact feed into lender’s affordability calculations over the next few months as Office for National Statistics (ONS) expenditure figures are updated. 

Whatever the income bracket, everyone is facing skyrocketing bills and the complications that come along with an inflation rate of seven per cent year-on-year as of March 2022, which the BoE has described this as “uncomfortably high”. 

ONS data from March reveals 23 per cent of UK adults found it difficult to pay household bills. For renters, who skew largely towards lower income brackets, this figure increased to 37 per cent. 

The treatment of rent payments is actually one way that could be used to ease the mortgage affordability squeeze. At the moment, there are millions of potential first-time buyers who clearly demonstrate that they can afford to pay rent every month, often at a higher price point than a mortgage would be, but who are excluded by current affordability calculations.  

We need more data and analysis in order to fully understand the issue and ensure affordability works for renters – something which MBT is actively working on as we speak. 

  

Finding balance 

Affordability is all a matter of balance.  

For example, we need to make the most of modern technology, and the incredible granular data analysis it is able to provide. But we also need to remember that these algorithms can only be as good as the data that is included, and so the addition of something like rental payments can only help to improve the outcomes. 

In general, the market as a whole must strike a delicate balance between making affordability rules more flexible, while also protecting borrowers and the wider UK economy by making sure to lend responsibly. 

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