MBT recently published its affordability white paper report, in which they discussed the need for lenders to provide more affordability-focused, data-driven lending options with brokers and lenders.
Inflexible lender criteria
Lenders have been been more cautious towards self-employed borrowers, creating a growing niche for specialist lenders that are willing to take on more complex cases. The amount that lenders were willing to loan, which is one of the most Googled mortgage-based questions this year, varied drastically due to lender criteria, ideal customers, and the way they look at cases, according to the report.
Toumadj said: “Our white paper analysis was based on seven types of cases to establish how clients can get the loan size that they need, which had an average range of £120,000. That shows how lenders, based on their different elements of risk, are actively pursuing different types of customers. It’s also driven for personalisation, which we always advocate.
“Lenders are increasingly working on a more data and affordability-driven approach to product development.”
Profession is still a big factor
The research found that variables like the borrower’s job still played a key role in how much they could borrow.
Toumadj said: “Income make-up is a big factor, as well as criteria, and loan to value (LTV) is by far the biggest driver behind that when it comes to affordability assessments.
“Our previous research shows that there’s a massive range based on the types of income that lenders are looking at. You’ve also got different professional ranges – stable jobs like medics, dentists and teachers tend to get a higher loan to income (LTI) multiple.
“The future of affordable lending will be around the types of profession and income, particularly with the self-employed which has seen massive growth over the pandemic but lending to these people seems to have lagged behind.”
Tackling the gig economy
A lot of self-employed or freelancers are high earners when they get contracts, but can suffer from inconsistent work, with many therefore having less predictable but often multiple income streams, or taking decisions during the pandemic that scare a lot of lenders away.
Toumadj said: “The data around the gig economy is really important because it shows how lenders can become comfortable in the stability of those multiple income streams over time. The data-driven approach means they can be a bit smarter than just going with their gut feeling or hearsay with complex cases.
“For the self-employed, the things a lender is willing to look at as ‘income’ is a massive factor – whether the lender takes the average of the last three months or the lowest income for example, or whether the borrower has properties in the background.
“Going forward I think you’ll see more personalisation around affordability, but it’s not clear where those pockets will crop up.”
Lenders, like Habito, are also looking at longer term offerings, with a few coming to market with 20 to 30-year fixed term products, depending on criteria.
Toumadj added: “The high LTV space is already making a lot more progress – we’re seeing a lot more lenders looking at things like home equity loans, top-up loans, and adding more applicants against the mortgage as they see the niches.”
First-time buyers struggling but solutions are available
As the price of a first mortgage has matched the price of rent for the first time in 14 years, first-time buyers, typically young people with lower wages building their careers, are finding themselves in an ever more futile position as housing prices continue to rise.
Toumadj believes that without support, the UK is under threat of age-based social inequality as that first step on the ladder soars further out of reach. Particularly, at a time when the cost of living and rent has made saving up for a deposit even harder.
“First-time buyers are struggling to get on the housing market and it definitely feels stretched for them, but there are a lot of solutions, including the equity style loans and getting more primary guarantors on mortgages,” she added.
“Regional data shows differing house prices to income ratios, but the Bank of Mum and Dad is here to stay, definitely, in my opinion.
“If you don’t have schemes that support first-time buyers and young people then you just get more social inequality which no one wants.”
Technology and innovation to the rescue
Platforms that allow brokers to find clients the right options for them and combine those to create a hybrid product tailored to their situation could well be the future. The report noted that on average, brokers save 47 minutes per case by using mortgage affordability platforms, which are becoming increasingly used.
Toumadj said: “There is innovation like equity and second charge lending that increase the capability of first-time buyers, which brokers can package together. It’s complicated, but we do have the technology to add those other options.
“For all of those innovations you have to educate the brokers, which is where we’re trying to step in by having all the alternative lenders on our platform.
“It ultimately comes back to what’s easiest and most helpful for brokers in speeding up the process.”
MBT will be running two separate webinars based on its affordability white paper – one for brokers and one for lenders – to talk through the results of the research in greater detail, with registration also available on the website.
