Coping with the affordability crunch

Marie Grundy, Managing Director of Residential Mortgages & Second Charges

For more than a decade following the financial crisis, mortgage borrowers in this country had things relatively easy by historical standards.

Rates were low, the choice of products ample, and inflation ticked up fairly benignly - meaning affordability wasn't much of an issue for most. Unfortunately, those days are over, for now at least.

This won't be breaking news for those operating in our industry, but borrowers are now grappling with a toxic combination of a once in a generation cost-of-living crisis, soaring mortgages rates and falling real wages. The Financial Conduct Authority (FCA) estimates that those remortgaging this year will see their repayments rise by an average of £340 a month. This comes as the price of everything else is rising, too.

Clearly, this is causing enormous strain for a lot of people. In May 2023, Which? estimated that around 700,000 households had missed a mortgage or rental payment in the preceding month.  

Prudent lending

As a business, we have always taken a forward-looking lending approach to match the economic environment and ensure we make prudent lending decisions to mitigate against consumer harm. 

We have a situation at the moment where there are a lot of borrowers who remain a good credit risk, but are locked out of the market due to malevolent macroeconomic forces. These people may be on more money than they were they first look out their mortgage, and they may even have more in savings and lower overall debts. However, the challenges around affordability are real, set against a backdrop of rising interest rates and the cost of everyday goods, which has soared with unprecedented speed. 

By taking a more manual approach to underwriting, I believe wholeheartedly that lenders can alleviate the pain for thousands of borrowers.

Practical application

For those lenders which offer a more individual approach to underwriting, this means increased opportunities to look at applications with more complex income structures.

To give an example, we regularly see applications from borrowers with multiple income sources, such as part-time landlords who generate rental income, or homeowners who have a second job with sustainable working hours. This also extends to pension income, maintenance payments and benefit income. 

Utilising regular additional income as part of affordability assessments could mean the difference between a pass and fail for a surprisingly high number of borrowers. 

The same goes for borrowers who receive regular and consistent bonus, overtime and commission payments, if the borrower can demonstrate a decent track record of additional earnings in line with previous years' earnings. Self-employed borrowers can also face additional hurdles when it comes to obtaining mortgage finance, which again is where that personal approach to understanding individual circumstances can be of benefit. This is particularly relevant following the upheaval caused by the pandemic. 

With the right due diligence, there is no reason why a self-employed borrower with shorter trading histories, or who can rationalise any variations in their trading performance, cannot be a good credit risk. These are just a few small examples of the ways lenders can adapt their criteria to fit the current environment without taking on unnecessary added risk. 

By adopting a more flexible approach, more borrowers will have the opportunity to access mortgage finance, particularly those who need options outside of the high street, at a time when an increasing number of homeowners and first-time buyers are in need of our support. 

Published in The Intermediary | June 2023, p.54

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