Being a financial ‘misfit’ could soon raise new problems. Post-MMR many people could find themselves becoming ‘mortgage misfits’ as a result of requirements of the Mortgage Market Review.
The new rules are designed to protect consumers and prevent the excessive lending by some lenders of pre-2008, which is vital.
However, it’s possible that some individuals, even those with a good credit history, may not pass the new affordability process. So what do these ‘mortgage misfits’ look like?
What worries me is that ‘misfits’ could be very ordinary people. Our testing has identified that those on incomes under £25,000 p.a, the self-employed, and small business owners could be damaged by the new criteria. It’s largely assumptions about these borrowers’ spending that could deny them a mortgage.
For example, take a family of two adults and two children on an income of £25,000. Under the old system, they might have been eligible for 3.5 times their salary – giving them access to up to £87,500. Under the new rules, using average expenditure data, we see them as likely to be rejected for loans of £70,000-£90,000.
This is the result of automated assessments – a calculation of ability to pay based on the expenditure of an ‘average’ borrower, and not the customers’ true financial picture. A lender could make assumptions about the applicants’ energy bills, food shopping and even what they spend on clothes. In fact, this family are careful spenders with outgoings significantly below national averages. So what then?
An ordinary income coupled with sensible spending shouldn’t be a barrier to home ownership.
I want to declare our support for these mortgage misfits. Our focus is on manual underwriting and taking the individual’s full circumstances into account. This includes accepting customer-certified evidence of their expenditure. Some larger lenders may not do this, if that’s not their model. I would urge misfit borrowers (or their brokers) to find a lender that does.
Paul Winter is chief executive of Ipswich Building Society
