Inflation is at a 40-year high and Office for National Statistics (ONS) data has revealed that 23 per cent of UK adults are finding it difficult to pay household bills.
The latest Mortgage Solutions’ poll revealed that an overwhelming majority of brokers, 63 per cent, were seeing their clients already start to struggle with affordability while 37 per cent said they were not.
‘This situation is only likely to get worse.’
Tanya Toumadj, CEO at Mortgage Broker Tools (MBT), said data from the MBT Affordability Index and its previous white paper reflects the sentiment of most of our respondees.
She added: “More customers are struggling to demonstrate the affordability they need to borrow the loan sizes they request. In January 2021, only 18 per cent of customers were offered a loan size smaller than they requested, but in April this year, this had risen to 23 per cent of customers.
“This situation is only likely to get worse.”
Ian Hewett, adviser at Aims Financial and The Bearded Broker, reported that while none of his current client base is struggling, but there are signs the wind is changing.
He said: “I have had a couple of enquiries from single applicants, and they are going to get hit hard with the affordability calculator used. With only one income stream and bills increasing faster than the details on Sue Grays’ report, it will be a more challenging landscape for those individual borrowers nearer the ONS national average wage.”
Greg Cunnington, COO at LDN Finance, feels first-time buyers are “definitely feeling the pinch now more than ever.”
“I suspect renters will be mainly impacted by the cost of living rises, but we have not seen it impact those buying. We continue to see a huge desire for first-time buyers to get on the ladder or for home movers to upgrade.
“In the higher loan space it has not had any impact at all, as those higher net worth individuals are much less impacted. The £1m plus market is as hot as ever right now.”
However, Robert Payne, director at Langley House Mortgages, reported that buyers were already borrowing at their maximum capacity “just to get on the ladder or upsize”.
He added: “Monthly mortgage payments are already significant for many borrowers and that was in the best possible circumstances. I think many will notice a real difference in disposable income and will have to cut down on luxuries.”
How should advisers handle affordability issues?
As ever, it is down to advisers to guide their clients through the gathering storm with the personal touch the industry provides.
Lewis Shaw, founder and adviser at Shaw FS, said: “The biggest tips to get the maximum borrowing are to clear off as much debt as possible, save as big a deposit as possible and then speak to a great local independent broker who knows the area.
“Getting on the property ladder is never a no; it can sometimes be not right now. If that’s the case, I help potential customers make a plan, and we review it three, six, nine or 12 months down the line and pick up where we left off.”
Imran Hussain, director at Harmony Financial Services, said: “The clients I have found that are having a problem with this are those with average incomes but large unsecured debts so the conversation is having to be had around what’s more important right now: the new car personal contract purchase (PCP) or actually purchasing a home. For the clients I speak to, it’s never a no without a reason provided so people can understand what the exact issue is and how to rectify it.”
Cunnington takes a more technical approach. He said: “There are quite a few options available from a mortgage perspective that can help. Buyers can extend the mortgage term to keep monthly payments lower, with many lenders now allowing terms of up to 40 years.
“For those lucky enough to have the deposit available, we have also seen an increase in interest only applications for the same reason. We have also seen more buyers than usual look to fix in for longer, to guarantee security over their monthly payments for a longer period.”
Hewett believes that making the right business partnerships is the right way to help clients.
He said: “I have partnered up with a utilities warehouse provider to try and ease some pressure and talk through cashback website options that are available to all my clients.”
Toumadj believes that the scope of the products advisers offer their clients could make a massive difference too.
She said: “Alternative types of products, such as second charges, or income boosters, can help customers increase their borrowing in a way that is managed and sustainable.
Scott Taylor-Barr, financial adviser at Carl Summers FS, said: “There are a number of lenders that have extended affordability rules for certain occupations; professional and key workers for example, so sometimes a client cannot get the mortgage they would like from the high street, but can get it from a lender offering these types of schemes.”
How lenders should respond
ONS data on normal items of household expenditure is going to feed into lenders’ affordability calculations in the coming months, and this will naturally reduce the loan sizes that are available.
At the same time, property prices continue to rise and a recent report by Rightmove said asking prices have hit a record high.
Rob Peters, principle at Simple Fast Mortgage, feels that lenders’ affordability calculators need to be updated in real time due to the pace of the economy as there is currently a “lag”.
He said: “If the economy continues down this inflationary path, lenders will certainly tighten their affordability belts further. However, some lenders are inherently more risk averse, while others are able to offer higher borrowing amounts reflected by higher charges and interest rates.
“The key danger is that pushing a client’s affordability to the maximum takes away the financial cushion. If things go wrong, these borrowers will find themselves in financial difficulty first.”
Taylor-Barr added: “The underlying data lenders use has changed, so the same household income will get a lower mortgage at the end of this year than they would have been offered at the beginning. That’s frustrating if your house hunt takes a few months, but more worrying if you have a mortgage already, as you could potentially be unable to remortgage away from your current lender. That’s not an issue if your lender offers good value deals to existing clients, but a big issue if not.”
Payne has a slightly different outlook. He said: “I have spoken to buyers who are due to view properties and had to tell them that they can’t borrow the amount they need, but there are some options that have been working really well, such as Nationwide’s ‘Helping hand’ scheme, which allows first-time buyers to borrow up to 5.5 times their gross income compared to the more common 4.5 times.”
However a lot of brokers want lenders to take a more data and tech-driven approach to affordability calculations, particularly once things settle down at the Bank of England, according to Toumadj.
She said: “The affordability gap is only likely to increase. Lenders may have some more flexibility in their calculations following the end of the Bank of England’s consultation on its three per cent stress affordability stress test. The Bank estimates that this change will allow six per cent of borrowers to get the loan they wanted.
“This could lead to greater personalisation and more appropriate loan sizes offered to individuals.”
Toumadj said lenders also need to take a borrowers’ rental payment history into account to “ease the squeeze.”
“There are currently millions of potential first-time buyers who clearly demonstrate that they can afford to pay rent every month, often at a higher price than a mortgage, but are excluded by current affordability calculations.”
“Ultimately, creating a more inclusive affordability environment will be a delicate balance between making affordability rules more flexible, while also protecting borrowers and the wider UK economy by making sure to lend responsibly. This can only be achieved through greater use of data and technology to help drive product development and selection,” she said.
