Earlier this year, Mortgage Broker Tools (MBT) conducted a survey amongst brokers and found that nine in 10 (89 per cent) said they had to work harder to secure the loan size their clients wanted than they did last year, while 94 per cent of brokers said affordability has become even more complex in the last 12 months.
At the same time, more than three quarters (76 per cent) of brokers said they work with clients they believe should be able to get a mortgage, but whom they cannot currently place with any lender because of affordability.
So, what can lenders do to address this?
Given all that has happened in the last year, it’s perhaps easy to forget that on 1 August 2022, the Bank of England removed its three per cent affordability stress test recommendation, which puts much greater emphasis on the role of standard variable rate (SVR) in how much a customer can borrow.
At the time it was first introduced when SVRs were much lower, lenders did little to act on the change. However, a year down the line, with much higher rates, a lender’s SVR has a much greater impact on the loan sizes it is able to offer.
What an adjustment to SVRs can do
At MBT, we analysed a selection of five lenders across the market to understand the potential impact that reducing their SVR could have on how many more mortgage enquiries would be considered affordable and, therefore, how many more customers they would be able to help.
We applied a 25 basis points reduction to existing SVRs and found that, overall as an average across all the lenders reviewed and across all loan to value (LTV) brackets, if this were to be introduced, nearly seven per cent more enquiries would be considered affordable.
Based on the Bank of England’s latest lending data, which said there were 93,800 mortgage approvals in June, this could potentially result in another 6,500 successful enquiries.
Our analysis found that, with one lender, decreasing SVR by 25 basis points could result in more than 13 per cent more affordable cases between 71 per cent and 80 per cent LTV.
Of course, a change in SVR would also need to take into consideration the immediate recognition of reduced income on an effective interest rate basis through loss of SVR income.
Not all lenders are choosing to pass the latest base rate rise on to their variable rates. Skipton Building Society, for example, has said it has chosen to shield its borrowing members by not increasing its SVR.
No easy solution
Of course, simply reducing SVR is quite a blunt tool, but there are alternative options for lenders to develop their propositions in this more complex affordability environment.
For example, at MBT we have launched our sandbox, which empowers lenders to best build, price and deliver improved mortgage propositions, helping them to make smarter product, pricing, criteria and affordability decisions using advanced analytics and real-time data.
They can also edit initial and reversion rates, as well as stress rates, to see how pricing impacts elasticity once criteria and affordability are taken into consideration.
As we move into the latter part of what has been a challenging 2023, lenders will certainly be looking at ways they can hit their targets in 2024 and affordability will be a major battle ground.
Our survey earlier in the year found that more than half of brokers think only smarter lenders will develop products based on affordability, so which lenders will stand out from the crowd?
