Within its recommendation it says that the loan to income (LTI) flow cap, which currently stands at 15 per cent at or above 4.5x LTI, combined with a wider affordability assessment, will be more ‘predictable and proportionate’ whilst also delivering the resilience required by the financial system.
The Bank of England (BoE) has previously estimated that this change will allow six per cent of borrowers to get the loan they want, and it could open the door for a more bespoke data-driven approach to affordability that takes into account the fact that buyers are unique. The new rules come into effect on 1 August, so what will it mean for affordability?
Downward pressures on affordability will outweigh positive uplift
It’s certainly a positive move. Affordability is a hot topic and it’s great that the BoE has acknowledged this with a change to its regulation. A more data-driven approach to affordability will deliver more appropriate results and it may help some borrowers to achieve the loan size they need to buy the home they want.
But, in the short term at least, it looks like the downward pressures on affordability are likely to outweigh this positive uplift. The increasing cost of living will continue to lower borrower’s affordability calculations as the ONS adjusts its expenditure figures and these are fed into lender calculations.
This will disproportionately impact borrowers on lower incomes, who are already finding it hard to secure the loan size they request.
Data analysis from thousands of cases researched through MBT Affordability in April showed that 29 per cent of mortgage applicants whose household income is less than £62,000 were offered a loan size smaller than they requested.
This compares to 12 per cent of mortgages applicants whose household income is more than £62,000, but less than £100,000, and just 11 per cent of mortgage applicants with a household income of £100,000 or more.
Lender stress rate movement uncertain
At this point, it is still unclear what stress rates lenders will move to and how quickly. They will need to start analysing the data to understand the impact the changes could make to their lending, if they have not already begun to do this.
Detailed data analysis from across the market could help to identify currently underserved segments of customers to whom they may now be able to lend.
This is a positive change and will help a more data-driven approach to affordability innovation. For time being, however, affordability is going to be tough for many borrowers, and this puts greater emphasis on brokers conducting thorough affordability research to ensure they are able to source the most appropriate lender for their clients.
