Despite this, the affordability of houses in the UK has remained a hot topic and research from Cogent suggested people were overstretching themselves, breaking the 28 per cent ‘golden rule’ by committing more than a third of their salaries to mortgage payments in order to get onto or remain on the property ladder.
This week, Mortgage Solutions asked: Do you follow the 28 per cent ‘golden rule’ of how much income should be spent on mortgage payments when advising?
The so called 28 per cent rule, also called the 28/36 rule, of how much income should be spent on household costs is a common sense rule used by lenders to assess whether they want to lend to an individual.
As far as I am aware, most of the lenders applying this rule originate from the USA.
As mortgage intermediaries, VA Mortgages do not adopt such a rule specifically. We do, however, carry out a careful and thorough fact find with our clients assessing both hard and soft facts so that we can agree with them an affordable monthly budget for mortgage costs.
Given our current low interest rate economy, it is also important to discuss the impact of future interest rate increases.
If the 28 per cent rule is valid today, it may well not be in a couple of years’ time if interest rates go up at a faster rate than earnings.
Mortgage intermediaries are obliged to assess whether or not any recommended mortgage contract is suitable for a prospective client; included in this is the need to consider the expected criteria of the proposed lender including the expected affordability criteria.
As all intermediaries will know, there isn’t a one size fits all approach with affordability criteria from UK lenders.
We think a far better approach is to treat each set of clients as individuals and arrive at a sensible budget for both their present day and future circumstances before making a suitable recommendation.
Locking them in to a static, arbitrary, debt to income ratio could lead to a recommendation of an unsuitable mortgage and future problems for both client and intermediary.
The area of the country I work in – I’m based in Bury St Edmunds in Suffolk – is a property hotspot, so the climate of the last few years has been one where house prices have been outstripping income.
This inevitably means that there is pressure on the 28 per cent rule on more occasions than previously, and as result it is being exceeded purely so people are able to buy a house.
However, this is only ever done with a strict and thorough budget planning and analysis.
If the clients are going to stretch their budget, it has to be affordable now and in the future, so we will spend a lot longer going through bank statements to a near forensic level, to ensure we have a full picture of lifestyle and spending habits.
Only then – provided the clients’ total outgoings remain within 75 per cent of net income – do we proceed.
In summary, the rule is still useful and should stand, but as long as strict controls are in place to ensure clients are not overburdening themselves with repayments they can’t afford, a certain amount of flexibility should also be allowed, perhaps with regional variations on the percentage.
We are an evolving nation with a dynamic property market, so mortgages and the industry more widely need to adapt to reflect this.
To many the rule may seem unrealistic, but every enquiry received by a broker should be investigated, understood and advised upon on its own merit.
Many borrowers push the boundaries of borrowing to the maximum that lenders offer in this climate as the house prices rise faster than the rise in average income.
Many factors are to consider here and again, every set of circumstances must be evaluated.
Low interest rates are currently supporting affordability – we help borrowers exercise caution and consideration if the rates increase particularly at an accelerated rate for many borrowers.
Another factor is clients looking to push their capacity to leapfrog ahead to avoid the costs of multiple moves. For example, first-time buyers looking to buy what would be their third or fourth home in a higher interest rate climate.
Every personal situation is different and must be taken in its own merits.
As an advising brokerage looking at long term advice when considering mortgage borrowing – we do see a concern if the market moves quickly in say the next five years with increased borrowing rates.
Generally, we can’t ignore a statistic like this when advising clients – however rather than sticking to percentages it’s more important to make sure borrowing is sustainable and as future-proof as possible with each clients’ desired lifestyle.