The higher cost of living and rising interest rates have prompted lenders to rein in lending to buyers on lower incomes in recent months.
But now richer borrowers are also feeling the pinch, advisers have noticed.
Usually high earners are held back by loan to income multiples, but affordability has started to creep in to these applications, according to Chris Sykes, technical director at Private Finance.
He said: “It is not unusual for lower earners to be limited by affordability rather than the other measure which is income multiples, however this is the first time several of our brokers including myself are seeing higher earners being capped on affordability. Previously these borrowers would have been capped purely on income multiples.”
For example, in one case Sykes has seen a client earning an additional £30,000 compared to a year ago, yet their borrowing is the same.
Dean Esnard, specialises in high net worth earners at Magni Finance.
He has also noticed stricter borrowing from lenders.
“We are seeing tighter affordability checks being carried out.
“These are more noticeable when the applicant has other credit commitments, loans, credit cards, etc.”
Higher energy and food prices mean that dependents are having a bigger impact on affordability, Esnard added.
The higher cost of living reflected in data used by lenders from the Office for National Statistics (ONS) has impacted borrowers across the spectrum, according to Greg Cunnington, chief operating officer at LDN Finance.
However, wealthier borrowers are typically offered more flexibility on the rules so there will usually be a solution of some sort available.
He said: “Most high earners have more complex income structures, with bonus income and vested stock regularly part of the package if employed, or tend to retain a lot of income within their companies if self-employed. So in reality a lot of this business is done using manual underwriting access at lenders where a more flexible approach to affordability is made.
“If a client is really impacted private banks can waive the normal affordability requirements using high net worth exemptions, so we also regularly help high net worth clients with this route.”
The Bank of England announced in June it would scrap the affordability test, which examines whether borrowers could afford a three per cent rise in interest rates.
The move has been celebrated as making it easier for some borrowers to get on the ladder.
However, with interest rates rising at the fastest pace in decades, it seems lenders are reluctant to let go of the measure just yet.
Santander confirmed to Mortgage Solutions there would be no immediate change in the way it assesses applications.
A spokeswoman said: “We are continuing to review the Financial Policy Committee’s recommendations and will inform our customers and brokers of any changes to our stress rates.”
Barclays, Halifax and HSBC did not return a request for comment on the issue, while NatWest and Nationwide said the information was commercially sensitive.
However, Mortgage Solutions understands that when asked in an Intermediary Mortgage Lender’s Aassociation meeting no lender said they had made any changes to affordability calculations or assessments as a result of the change.
There is a sense that no lender is willing to break rank on the issue just yet.
Chris Sykes, technical director at Private Finance said: “Building societies are asking us what other lenders are doing.
“We’ve barely heard from any lender what their plans are in relation to the change.”
However, in the longer term it is expected that lenders will embrace the opportunity to remove the test.
Greg Cunnington, chief operating office at LDN Finance said he understands all major lenders want to lower their requirements in this area.
He added: “This should help equalise the lower borrowing from the higher Office for National Statistics data now used, so will be a real positive.”
All three firms will now be able to offer MPowered Mortgages’ prime residential mortgages to their customers.
MPowered Mortgages is a fintech mortgage lender which uses artificial intelligence (AI) to enhance the mortgage journey for homebuyers and remortgagers.
Clients of Alexander Hall, LDNfinance and SPF Private Clients can already access MPowered Mortgages’ specialist buy-to-let range.
The new partnership means they will also have access to the lender’s suite of prime residential products which includes two, five, seven and 10-year fixed rate mortgages as well as its recently launched £500 cash back range.
Customers will also get a free valuation on every application, and a choice of no arrangement fee, as well as cash back options with rates starting from 3.17 per cent
MPowered Mortgages said it was committed to expanding its reach in the prime residential market by broadening access to its platform.
In the last 12 months MPowered, has expanded its number of broker partners to over 5,000 including Mortgage Advice Bureau and London and Country.
The lender has received investment backing from Barclays, Citigroup’s SPRINT arm and M&G Investments. It also celebrated its first birthday in April this year and opened a new office in Leeds.
Emma Hollingworth (pictured), distribution director at MPowered Mortgages, said: “We are delighted to be teaming up with Alexander Hall, LDNfinance and SPF Private Clients which not only demonstrates our commitment to growing our presence in the prime residential mortgage market, but also enables our prime range and mortgage platform to be accessible to as many homeowners as possible. At MPowered Mortgages, we remain dedicated to revolutionising the mortgage process for brokers and customers alike.”
Mortgage innovation and support
Gareth Lowman, director at SPF Private Clients, said: “Through this partnership, not only will we be able to offer our customers more choice, but also a faster application process and a smoother mortgage journey overall by using MPowered’s AI-driven platform.”
Stephanie Daley, technical adviser at Alexander Hall said as the cost of living continues to increase, homebuyers and their brokers were looking for more innovation and support from lenders. She said: “We’re looking forward to working with MPowered Mortgages, and are confident that their range of products and use of tech will enhance our ability to provide buyers with solutions beyond the big six banks that best cater to their specific needs and allow for quicker processing times.”
Greg Cunnington, chief operating officer at LDNfinance, added: “We’re delighted to be able to provide our customers with access to MPowered Mortgages’ forward-thinking mortgage platform which uses AI and data science to speed up the process of getting a mortgage. The mortgage industry has been notoriously slow to adopt technological solutions, and with brokers now facing more pressure than ever to secure mortgages, it’s more important than ever that lenders follow MPowered Mortgages’ lead to utilise technology to streamline the homebuying process. We look forward to working with MPowered Mortgages’ as we as an industry continue to drive towards a smoother road to homeownership.”
In a video panel debate, Duncombe said: “The amount of times we’ve opened brokers’ eyes to the fact we have no minimum income on buy to let (BTL) or that we lend in the new build space. The new system has reduced our speed to offer by three days on average.”
Mortgage lender Accord brought all residential and buy-to-let mortgage processing onto one system and has dual mandated its underwriters, so in busier times the lender can flex resource and draw underwriters across from either specialism to retain lower turnaround times.
In the debate on service, Greg Cunnington, chief operating officer at LDNFinance, said trust in a lender is the biggest factor for brokers particularly when you’ll always need to talk small elements of the case through.
“Particularly in the specialist market, some lenders offer a three-to-four week service working level agreement. In this market with our client base, particularly on purchase, that doesn’t really work,” said Cunnington.
Liz Syms, owner of Connect Mortgages and network Connect for Intermediaries, said Accord’s system changes had been appreciated as had its single email to brokers on every case with a full update of all the underwriting requirements. She said this is in direct comparison with other lenders who often take a more ‘drip-feed’ approach to information requests.
“You have to remember, there’s a customer at the end of all this,” she said.
“The broker may often have forgotten something and so will need to go back and ask for more, so it’s great when the lender provides this list,” she added.
Watch the full debate (above) on service in the buy-to-let market on the video. [05.00]
See the other videos in the series
Part one: Our panellists brainstorm the buy-to-let product gaps
Part two: On the green EPC deadline and the refinancing opportunities
Part three: On the biggest opportunities for brokers in 2022
This video has been sponsored by Accord Mortgages. For intermediary use only.
A decision in principle (DIP) pulled together for a client a couple of months ago has been run again more recently with the offer reduced by around £20,000, in one case seen by Mark Dyason, founder of Edinburgh Mortgage Advice.
The numbers and circumstances of the client are all the same, but in the meantime the cost of living so, inflation has hit nine per cent, and the Bank of England has nudged up the base rate.
Dyason said: “What happens to a 95 per cent LTV mortgage in two years’ time when they can’t afford the mortgage?”
Duty of care from brokers towards clients at the top of their borrowing limits is particularly pertinent in the current environment, he added.
“We help clients get a mortgage, but then make sure they can get rid of it [pay it off].
“For those stretching as far as they can go, there is a duty of care around long-term affordability and mobility. We need to make sure they don’t end up wanting to move and actually they can’t.”
Simon Cutler, director at Blackdown IFA, is worried that people may be left paying variable rates when they come off their fixed rates in the year or so if they can’t pass lenders’ affordability assessments.
He fears rising inflation and mortgage rates have created a “perfect storm”.
“Lenders’ affordability criteria assessments are going to be much more difficult for borrowers to meet when they come out of their current deals.
“Those coming out of fixed rates, could see mortgages costing them thousands of pounds more.”
Cutler said he is also talking to clients about how they can protect themselves, and where it may not be a good idea to overextend.
He added: “It’s a real risk, mortgage prisoners.
“I try not to remember the bad times, but I’ve worked through two or three really tough times.
“The combination of factors doesn’t look great.”
Dean Esnard, director at Magni Finance said the option for product transfers should help make sure most borrowers don’t end up on high variable rates.
He said: “When you do a rate switch you don’t go through an affordability check – providing you have maintained your mortgage payments.
“You are forced to stay with whatever your lender offers you, but normally the rates an existing lender will offer you are better or in line with the existing market.
“From what we’ve seen there is nothing to panic over yet. Rates have increased a lot but I think they will slow down.”
Lender reaction
Nationwide recently increased its Loan to Income (LTI) multiple to 6.5 for customers remortgaging on a like for like basis.
The lender said the move may go some way towards helping mortgage prisoners created by the higher cost of living and rates.
Brokers are hoping that the market will follow Nationwide’s lead and adapt to the changing climate.
Greg Cunnington, chief operating officer at LDN Finance, said: “Clients have been stress tested at much higher rates, typically the lender’s Standard Variable Rate + three per cent, when taking out their original mortgage as part of MMR. As such, even though mortgage rates have increased the payments should be comfortably affordable as will still be much lower than these stress tested rates.
“However, mortgage rates have increased quite dramatically compared to two years ago, when a lot of people will have taken their current fixed rates.
“With increased costs for utilities and other living expenses, clients should be prepared for these increases to their mortgage rates and monthly mortgage payments as it is very likely that clients looking to remortgage at the end of their current fixed rate will be moving to a higher rate.”
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.
In a video series in partnership with Accord Mortgages, Greg Cunnington, chief operating officer at LDNFinance (pictured) said: “Most of our landlord clients have stock in the South East, a lot of which is D to E rated. We’re hearing stories about EPC reports done a long time ago, some clients are spending £20-30,000 on works to get the same rating at the end of it because the legislation is harder now.”
He said landlords need to do the right research, get more information and a clear understanding on what could push the EPC to an acceptable level of A to C.
Liz Syms, owner of Connect Mortgages and Connect for Intermediaries, said: “There are tools that can help, if you’ve had an EPC done recently you’ll see it does make specific recommendations on what can be done to upgrade that rating. Whereas if you bought a couple of years ago, you’ll probably want to get an up-to-date one done and go to the government website* and get that instructed.”
“We need to educate brokers and clients on how to go about it,” she added.
Cunnington added: “As a firm we can help, when we’re contacting landlords having that information to hand, having third parties we know they can speak to, trade bodies that can help, tradespeople to contact, but it is a big opportunity and the whole reason we’re here – to advise.”
Syms said that as a network and for intermediaries, there is an advice risk to consider: “But the devil is in the detail. There’s a lot we don’t know at the moment about what the exceptions are going to be around affordability and the properties, so there’s also a danger around rushing the educational piece and people spending a lot of money and it not doing the job.
“On capital raising – what are the choices? Further advances, second charge – is your knowledge up to speed on all those options? But as an adviser – 50 per cent of the buy-to-let market is on a five-year fix so you’re locking your customer onto a rate that goes beyond 2025.
“If that lender doesn’t offer further advance, as many in specialist markets don’t or allow second charges, the customer will have to pay an early repayment charge (ERC) to capital raise,” she added.
Jeremy Duncombe, managing director at Accord said there are a number of further challenges to hitting the 2025 deadline of an A-C rating on all new tenancies.
“Even if landlords want to make those changes, which they will have to do for all new tenancies, its about getting tradespeople to come in and do that work. It’s also being able to get properties like Victorian terraces up to a C-rating, which is going to be difficult. But lenders can play a huge part in the refinancing opportunities – capital raising, debt consolidation, these are all things we can look at.”
He added at the recent Buy to Let Market Forum events, it was surprising how few brokers seemed to be aware of the deadlines, so those conversations with landlords are really important to have.
* https://www.gov.uk/get-new-energy-certificate
See the first part in the buy-to-let mortgage-focused series here on the product gaps brokers would like lenders to fill in the buy-to-let market, which ran on 23 May.
This video has been sponsored by Accord Mortgages. For intermediary use only.
During the discussion, supported by Accord Mortgages, Liz Syms, owner, Connect Mortgages and network and Connect for Intermediaries reflected that despite a varied product universe on buy to let (BTL), there are still product gaps to be explored.
“There are a couple of areas. One is retention in the BTL space. Some refurbishment products allow a bridge first then a refinance onto a term, but there are less products now than historically, which allow a term from day one on a property that requires some refurbishment, but have a retention for the cost of that work.”
She added: “If a lender could offer a product that offers a retention, the client has the guaranteed exit without the cost of a bridge.”
Syms also said that financing for modern methods of construction (MMC) is available from developers but still not on the mainstream mortgage side despite the importance of the green agenda.
Greg Cunnington, chief operating officer at LDNFinance noted that Accord had made some positive changes to its interest coverage ratio, which will help on affordability, and added that although Clydesdale and Barclays were doing ‘top-slicing really well’ more lenders still needed to offer a pure top-slicing model.
He said: “A lot of lenders are doing very similar things at the moment but lenders could try doing something unique and marketed as their own. In one example, we’re seeing a lot more let to buys for those looking to go chain free – you get stamp duty refunded if you sell in the first three years.
This is the first in a series of four buy-to-let debates with panellists Jeremy Duncombe, managing director at Accord Mortgages, Liz Syms, owner, Connect Mortgages and network, Connect for Intermediaries and Greg Cunnington, chief operating officer, LDNFinance and hosted by Victoria Hartley, group editor at Mortgage Solutions.
Part two of the buy-to-let debate series is set to go live on Wednesday 25th May.
Sponsored content created on behalf of Accord Mortgages. For intermediary use only.
The market has rarely been so turbulent or technical; house prices are soaring to record highs with continued lack of supply against overwhelming demand, and some properties are making more money than their owners do annually. Brokers are also seeing more complex cases and specialist lenders are being “forced into the spotlight” as borrowers’ needs become increasingly diverse.
So, this week, Mortgage Solutions is asking: What is the perfect mortgage product, and can it become a reality?
Greg Cunnington, COO at LDNFinance
The perfect mortgage product would be a lifetime fixed rate at two or five-year pricing, no early repayment penalties at any time; no lender fees. How about a 100 per cent loan to value (LTV), all available on an interest only basis, and the lifetime fixed nature meaning affordability can be stretched to 10 times loan to income (LTI)? I can feel lenders beating down the doors to create this masterpiece.
Sounds good right? But the above is a combination of what clients think would be their perfect mortgage product were this an execution-only industry – thank goodness for advice – but the reality is that none of the above would be realistic or possible as a combination. However, elements of all carry true – a mortgage product needs to be priced as competitively and fairly as possible.
In fairness, lenders are doing a great job here, with margins wafer thin right now, but clients increasingly want the flexibility to overpay more, so an increase to 20 per cent of the loan amount from 10 per cent as industry standard would be great. The more products on the market with no early repayment penalties the better, which some lenders already do very well.
The perfect product would be different for every client circumstance. For some of our larger loan clients for example, they love the ability to be able to purchase at a higher LTV but on an interest-only basis with committed bullet repayments to pay the loan down in the initial period, so they like this flexibility. They are also comfortable with an initial short-term product. By contrast, for some clients in settled financial circumstances on basic salaries with no plans to move, a longer-term fixed rate may well be the peace of mind they want.
The key is to ensure we have as much diversity in the products available on the market as possible. Different lenders should play to their strengths and offer different product types, so that as intermediaries we can do what we do best in finding the best option for our clients and their individual circumstances.
Charlotte Nixon, proposition director for mortgages and protection at Quilter Financial Planning
The perfect product is always the one that best suits a client’s unique financial circumstances and therefore there is never going to be perfect product for every type of buyer. However, first-time buyers do all face a very similar problem and one that has been massively exacerbated by the surge in house prices and the cost-of-living crisis.
Young people, or ‘generation rent’, have never faced a bigger battle to get onto the housing ladder and the struggle starts with saving for a deposit. The perfect product for this group needs to address the fact that first time buyers keep getting the rug pulled from under them while they save. House prices surge and the deposit they have been building no longer gets them what they need. The advent of lifetime ISAs and the implementation of other government schemes have had some limited success but we need lenders to build into their products a mechanism of helping buyers with their deposit too.
In theory, if a lender feels that a customer has the ability to pay back a large sum over a long period then there should also be a means of lending a smaller amount for the deposit over fewer years at a higher rate.
The increase in the popularity of guarantor mortgages has helped in this respect but there are still many people out there that don’t have this available to them. More innovation in this space could help shape a product that better suits the needs of first-time buyers that are living in fiscally very different times to when many of the blueprints to the products on the market now were created.
Nick Morrey, technical director at Correco
Borrower’s requirements are extremely broad, so the perfect product would have to be a mixture of both criteria and features.
For residential it would be a dream to have a product that was competitive in price with two, three, five, 10 and 20-year fixed rates that all have early repayment charges (ERCs) for a maximum of five years or opt out clauses for standard sale/reduction/redemption, and flexible with more than 10 per cent overpayment and borrow back facilities – similar to offsetting but not as far as a ‘single account’.
Affordability would be based on affordability only – no income multiple limit, especially for longer termed fixed rates.
The market did have something similar years ago, but flexible choices have dwindled and longer-term rates have never taken off, largely due to long, inflexible ERC periods.
Another dream would be to add some adverse history tolerance but with slightly higher rates and an automatic re-scoring either every year or at the end of the product term. This would enable an adverse borrower to switch to a prime lending product without the need to remortgage the moment they are able.
Lenders may struggle to provide such options, but some were readily available before 2009. Investment in systems and new ideas has almost ceased, potentially leaving the industry ripe for a disruptor with sophisticated, flexible systems to force innovation and investment beyond just rate and criteria tweaks over dividends and stagnation.
Finally, lenders could try and harmonise their legal requirements so a remortgage requires hardly any legal work at all – something like the current account switch guarantee to encourage consumer choice.
