Within its recommendation it says that the loan to income (LTI) flow cap, which currently stands at 15 per cent at or above 4.5x LTI, combined with a wider affordability assessment, will be more ‘predictable and proportionate’ whilst also delivering the resilience required by the financial system.
The Bank of England (BoE) has previously estimated that this change will allow six per cent of borrowers to get the loan they want, and it could open the door for a more bespoke data-driven approach to affordability that takes into account the fact that buyers are unique. The new rules come into effect on 1 August, so what will it mean for affordability?
Downward pressures on affordability will outweigh positive uplift
It’s certainly a positive move. Affordability is a hot topic and it’s great that the BoE has acknowledged this with a change to its regulation. A more data-driven approach to affordability will deliver more appropriate results and it may help some borrowers to achieve the loan size they need to buy the home they want.
But, in the short term at least, it looks like the downward pressures on affordability are likely to outweigh this positive uplift. The increasing cost of living will continue to lower borrower’s affordability calculations as the ONS adjusts its expenditure figures and these are fed into lender calculations.
This will disproportionately impact borrowers on lower incomes, who are already finding it hard to secure the loan size they request.
Data analysis from thousands of cases researched through MBT Affordability in April showed that 29 per cent of mortgage applicants whose household income is less than £62,000 were offered a loan size smaller than they requested.
This compares to 12 per cent of mortgages applicants whose household income is more than £62,000, but less than £100,000, and just 11 per cent of mortgage applicants with a household income of £100,000 or more.
Lender stress rate movement uncertain
At this point, it is still unclear what stress rates lenders will move to and how quickly. They will need to start analysing the data to understand the impact the changes could make to their lending, if they have not already begun to do this.
Detailed data analysis from across the market could help to identify currently underserved segments of customers to whom they may now be able to lend.
This is a positive change and will help a more data-driven approach to affordability innovation. For time being, however, affordability is going to be tough for many borrowers, and this puts greater emphasis on brokers conducting thorough affordability research to ensure they are able to source the most appropriate lender for their clients.
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.
According to the Mortgage Broker Tools (MBT) affordability index, just 37 per cent of borrowers aged 65 and over are able to get the loan size they request, compared to three quarters of younger people.
Further, some 28 per cent of borrowers aged 65 and up were offered a smaller loan size than they requested. For those under 65, 24 per cent were offered a smaller loan.
However, the average loan size required by older borrowers is significantly lower than their younger counterparts.
For those aged 65 and up, the average loan in March was £100,000 while those aged 65 and under requested £216,750 on average.
There are also fewer lenders able to cater to the borrowing needs of older people.
According to MBT’s index, some 35 per cent of lenders were unable to lend to over 65s at all in March, up from 26 per cent in January.
This drops to six per cent of lenders being unable to help those aged 55 and over, and falls further to one per cent when dealing with younger borrowers.
Tanya Toumadj (pictured), CEO at Mortgage Broker Tools, said: “As a culture, we often focus quite heavily on younger borrowers and, in particular, first-time buyers. However, we need to have a well-functioning housing market at all stages.”
She also noted that the UK had an ageing population, with the number of people aged 65 and over expected to exceed those aged 18 and under.
“This is a growing demographic, and they do not fit into a simple box, with many opting to work steady jobs for longer, for example,” Toumadj said.
She added: “While age can be a concern for what is fundamentally a long-term commitment, it is just not that simple. The mortgage market needs to focus on the individual, and in doing so provide a more certain landscape for borrowers who might present just as strong a lending option as many of their younger counterparts.”
Across the mortgage community, the ruling is expected to pass, after which lenders will have the freedom to set their own reasonable rate.
BoE estimates that this change will allow six per cent of borrowers to get the loan they wanted. This could also open the door for a more bespoke data-driven approach to affordability that takes into account the fact that buyers are unique.
However, there remains a question about whether the regulator should review its loan-to-income (LTI) flow cap, which currently stands at 15 per cent at or above 4.5 times LTI.
Habito and Perenna have already made a statement to say the current limit is not ‘fit for purpose’ and it’s likely that other organisations will also call for more action.
There is definitely borrower-led demand as 40 per cent of Mortgage Broker Tools (MBT) searches are for an LTI of 4.5 or greater. At the moment, a borrower looking to buy a £250,000 home, with a 15 per cent deposit and a salary of £35,000, needs an LTI of 6.1.
Cost of living risk
These may be positive signs, but they are being offset by the increased cost of living, which will lower borrower’s affordability and will have a disproportionate impact on lower earners, who will struggle the most to buy their own home. We will see this impact feed into lender’s affordability calculations over the next few months as Office for National Statistics (ONS) expenditure figures are updated.
Whatever the income bracket, everyone is facing skyrocketing bills and the complications that come along with an inflation rate of seven per cent year-on-year as of March 2022, which the BoE has described this as “uncomfortably high”.
ONS data from March reveals 23 per cent of UK adults found it difficult to pay household bills. For renters, who skew largely towards lower income brackets, this figure increased to 37 per cent.
The treatment of rent payments is actually one way that could be used to ease the mortgage affordability squeeze. At the moment, there are millions of potential first-time buyers who clearly demonstrate that they can afford to pay rent every month, often at a higher price point than a mortgage would be, but who are excluded by current affordability calculations.
We need more data and analysis in order to fully understand the issue and ensure affordability works for renters – something which MBT is actively working on as we speak.
Finding balance
Affordability is all a matter of balance.
For example, we need to make the most of modern technology, and the incredible granular data analysis it is able to provide. But we also need to remember that these algorithms can only be as good as the data that is included, and so the addition of something like rental payments can only help to improve the outcomes.
In general, the market as a whole must strike a delicate balance between making affordability rules more flexible, while also protecting borrowers and the wider UK economy by making sure to lend responsibly.
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.
The brokers had been asked to state whether they strongly agreed, agreed, disagreed or strongly disagreed with the statement “Affordability is more complex than ever”.
In weighing their responses, the 86 per cent was evenly split with 43 per cent saying they strongly agreed and 43 per cent saying they agreed.
More than three-quarters, or 76 per cent, said they agreed that having access to accurate calculations on affordability was increasingly important as they navigated a dynamic landscape.
Details from the survey would be included in an independently commissioned white paper to be made available later this month, said MBT, a residential mortgage affordability platform.
The questionnaire also looked at how brokers integrated affordability into their advising and how affordability factored into the lenders they recommended to clients.
Tanya Toumadj, chief executive of Mortgage Broker Tools, said: “At MBT, we process a huge amount of data from live broker cases and we use this to educate the market about affordability and help lenders to refine their propositions. But we wanted to better understand the behaviours and attitudes of brokers when it comes to affordability.”
“When it comes to the role of affordability in the advice process”, she said, “the increasing complexity and the importance of accuracy, the results were conclusive. This is a key area of the market and it’s an area that is impossible to navigate without the right technology. We are looking forward to releasing more information later in the month about how brokers are using technology and what they want to see from lenders in the coming weeks.”
According to the Mortgage Broker Tools (MBT) latest affordability index, this was lowest level of affordable remortgage enquiries since July 2020. A mortgage is deemed affordable if there is at least one lender that can meet the loan size requested by the applicants.
MBT figures show that the percentage of affordable remortgage enquiries has remained above 80 per cent since July 2020.
The index analysed cases processed through MBT’s research platform and showed a wide spread in the affordability available to remortgage customers, with the average maximum loan available being £253,000. The average minimum loan available dropping to £108,216 – a difference of nearly £145,000.
Tanya Toumadj, chief executive at Mortgage Broker Tools, (pictured) said: “There has been a lot of talk of a remortgage boom this year, but our data shows that fewer remortgage enquiries are considered affordable than at any time since July 2020.
“This could be due to lenders tightening their calculators, customers experiencing a change of income or hoping to increase their borrowing, or a combination of all three. What is clear is that full research, using a comprehensive and accurate affordability platform is vital if brokers want to give their clients the best chance of meeting their objectives and making the most of the potential remortgage boom.”
MBT Affordability provides brokers with a calculation of how much their clients can borrow. It features a panel of more than 40 residential and 66 buy-to-let lenders, based on affordability and criteria; results are delivered in under a minute, with no approximations or estimates.
MBT said it welcomed the addition of the lender to its affordability research platform.
Vida Homeloans specialises in complex mortgage cases and uses cutting-edge technology to deliver what it claims is an efficient and differentiated customer experience. The lender has 270 products, across residential, buy to let, houses in multiple occupancy (HMOs), multi-unit blocks, flats above commercial properties and expat investors.
MBT Affordability provides brokers with a calculation of how much their clients can borrow. It features a panel of more than 40 residential and 66 buy-to-let lenders, based on affordability and criteria; results are delivered in under a minute, with no approximations or estimates.
Tanya Toumadj (pictured), chief executive at MBT, said its data showed that even lenders rated highly on their affordability criteria were not always among the top 10 lenders when a more in-depth search was carried out.
She said: “It’s really important for brokers to carry out extensive research to ensure they are able to identify the most suitable solution for their clients.”
“The easiest way to do this is to use the technology platform with the most extensive panel in the market and at Mortgage Broker Tools we are committed to continue to deliver just that. This integration with Vida adds new affordability options for brokers and their clients, and will be particularly useful for customers with low credit scores and complex incomes.”
Richard Tugwell, director of mortgage distribution at Vida Homeloans, said the integration with MBT Affordability was an important step for Vida.
He said: “Unravelling complicated situations and helping customers often ignored by high street lenders, is an important element of our proposition.
“MBT provides an invaluable tool for brokers to help them understand which lenders offer the best affordability options for their clients. This is particularly useful for customers with complex income as there is a large variance in the loan sizes available to them and specialist lenders, like Vida, can often provide the most suitable solution.”
The MBT Affordability platform aims to save brokers time by providing them with results from a wider lender panel without needing to rekey data on multiple lender calculators.
The tool, which helps brokers know how much their clients can afford to borrow, was already being used by Connells Group subsidiaries and Dynamo, loading directly into the Connells point of sale system.
Now, MBT said, Countrywide advisers would also have access to the system as a way to help brokers save time and write more business.
Through a panel of more than 40 residential and 66 buy-to-let lenders MBT Affordability gives brokers an accurate look, rather than merely estimates, at how much their clients can borrow. MBT said results would be available in less than a minute.
Graham Closier, mortgage development director for Connells Group, said: “Due to its accuracy, simplicity and speed, the affordability tool has proven to be a big hit with our mortgage consultants since we partnered with MBT in 2019. The tool gives our consultants the confidence to accurately present affordability results to their customers quickly, rather than spending time manually calculating affordability for multiple lenders.”
Tanya Toumadj (pictured), MBT’s chief executive, said: “We have worked with Connells Group since 2019 and this launch of MBT Affordability to all Countrywide advisors is testament to just how much the platform is able to help brokers in their daily role.”
