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Lenders and brokers need to use data-driven affordability in the current environment – Toumadj

by: Tanya Toumadj, CEO at Mortgage Broker Tools
  • 12/09/2022
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Lenders and brokers need to use data-driven affordability in the current environment – Toumadj
House prices saw their first drop of the year in August, compounding predictions about a downward trajectory as the flurry of purchases seen during and post-pandemic stalls.

Mortgage Broker Tool’s (MBT’s) most recent Affordability Index found the average loan requested dropped back from over £218,000 in May to £210,000 in July, reflecting stagnant property prices. 

There are mixed views on the outlook for prices. Capital Economics has suggested a fall of as much as a 12 per cent in London, however there are contradictory reports that a downturn in the housing market will further reduce supply, which will help to underpin prices. 

Whatever happens, a slowing of the frantic recent pace in the market, should bode well for those looking to enter the housing market, or climb the ladder. However, as the cost of living crisis worsens, it was always inevitable that mortgage affordability was going to take a hit.  

According to our Affordability Index, the minimum loan offered has now reached the lowest point in 2022, sitting £73,525 below the average requested amount, while maximum loan offers are also falling.  


Brokers need to be proactive with clients

According to the Resolution Foundation, the spending – and therefore saving – power in British households is set to drop by an average of £3,000 over the next year, due to the rising cost of everyday needs such as energy, fuel and food. With landlords looking to shore up their own finances in the face of similar challenges, rent is also on the rise, meaning those in the private rental sector hoping to save for a deposit are seeing their dreams of homeownership shift further towards the horizon.  

With added financial pressures, including rising interest rates, comes the potential for missed payments on all kinds of debt – mortgages included – and ultimately, adverse credit, which could affect buyers long after the current crisis has eased. 

A tightening of affordability doesn’t just impact the purchase market – it could also stifle remortgage activity.  

There have been many reports about the wave of fixed rates that are due to expire in the final quarter of this year and for some borrowers, who may have concerns about passing affordability checks with a new lender, product transfers may look more attractive. However, the rates available on product transfers are not always the best available to a borrower and this fact is more important now than it has been previously, given the higher rate environment.  

With that in mind, now is the right time for brokers to be proactive in contacting clients to discuss remortgage options, and an affordability research platform can certainly assist those conversations. 


Stress testing 

In the coming months, mortgage affordability calculations will be subject to a number of different influences.

While 1 August marked the scrapping of the Bank of England’s mandatory three per cent stress test, recommendations for approving new mortgages, any potential boost to affordability has been offset by rising rates, and the ongoing cost of living crisis will continue to feed caution into lender calculations. 

At the same time, the new Prime Minister will want to make her mark, and the government has used the property market as a means of stimulating economic activity in the past, so there is reason to believe it could do so again.  

Whether this transfers into a review of loan to income (LTI) caps or even more radical reforms such as the ability for lenders to make affordability decisions based on the level of rental payments made by an applicant, is yet to be seen, but there is little doubt that affordability will remain in the spotlight. 

At times like this, there will be arguments on both sides as to whether loosening affordability or additional caution is the best policy. Lenders will need to make their own risk decisions within the framework of a changing regulatory environment and, now more than ever, those decisions will be best educated using real transaction data from the market.  

This will certainly be a focus for us at Mortgage Broker Tools in the coming months. We will work with lenders on developing their affordability models to create better outcomes for all involved, even during the current uncertainty. 

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