Where do I stand on the lenders affordability criteria, following all the changes in recent months?
Maximum affordability is the ‘real issue’ facing the UK mortgage market, and not rates. In this article I will explain why rate has become secondary to most would-be borrowers as the main pitfall they face is the affordability scrutiny of lenders, and also provide welcome solutions.
There is a massive amount of noise around restrictions on affordability following regulation and lending criteria changes with some of the major UK lenders, so I thought I would put the record straight as to how matters stand.
Basically lenders have had to bow down and kneel to regulation (in the form of the Mortgage Market Review MMR, April 2014); top level lender direction from Bank of England; and as announced today the Financial Policy Committee (again Bank of England) will have increased powers to stem potential personal borrowing. Why? Well the rationale is to prevent the UK housing market overheating.
The rules still in theory allow a market to operate but impacts those who aspire to own large properties or average ones in the case of London and South East. Such ‘nanny state’ governance stifles the free market philosophy our financial services has thrived on and been the envy of the world. Taking this stance sets precedent which is more in keeping with controls in Europe, which historically done them no favors, and until now kept the UK in the lead.
Income Calculations For Mortgages
Historically the generosity of a lender was benchmarked against ‘income multiples’. A transparent, and helpful measure to consumers.
Initially these were about 2.75 your gross income. In the early 90s there were certain lenders that extended this to 3.5 times. This century it is common to see 4 to 5 times, with some lenders stretching to as much as 6 times before MMR, and up until a couple of weeks ago 5.5 times remained intact.
Now the landscape is quite different.
Who has been hit the hardest?
The biggest losers have been applicants looking to borrow over £500k. It is perhaps for the masses to say if they have want to borrow half a million it serves them right! This of course, is a nonsense as all involved make up the house buying chain, and if one cog is dislodged the whole process comes tumbling down. You could argue that it should keep prices low (the Governments angle) but who has ever heard of property values plummeting over the medium term? This band of purchasers are normally looking at 4 times income at a push. To give you an example, joint income of £130,000 in today’s money can borrow £520,000, and this time last year it would have been £780,000!
In my experience the other category that is getting sidelined is the first time buyers. Nearly everyone I speak to is trying to borrow the maximum, and have sound increasingly disappointed when I break the news that although their peers who they know earn less than them (and who applied in the recent past), could borrow substantially more! Again, the Government will point at ‘Help-to-Buy’ as the panacea but owing part of a property is not the same as full homeownership.
Commitments
When factoring the maximum you can borrow lenders have always factored in ongoing commitments such as personal loan payments and credit cards. For MMR this expanded to look closer at financial dependents and lifestyle spending.
The new wave of measures go further still. Deductions from salary at source have greater prominence. Following the Government ‘NEST’ initiative most employees have a company pension with an obligation to pay-in. Some employers promote ‘Sharesave options’. In the past these would all be viewed as ‘discretional’ savings, a bit like putting £20 in a savings account a month, now most lenders see them as regular committed outgoings. Yes, that’s right they shave them off the affordability assessment. The same for private health contributions.
I can still get five times income for you
Despite the backdrop I can still obtain up to five times income for applicants with a clean credit history. I also have lenders that ignore pension contributions and view dependents favorably. So why be cheated out of your dream home by bureaucracy? If you want to borrow the maximum find out where you truly stand by calling and asking to speak to me.
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Author: Payam Azadi
Payam Azadi is a partner at Niche Advice who are whole of the market Independent Mortgage Brokers. His role is very much focused on Property financing both on residential and commercial lines.
