Tailored underwriting is going to be essential to help homebuyers overcome the mortgage affordability squeeze

Marie Grundy, Managing Director of Residential Mortgages and Second Charges

The days of ultra-low rates are gone and look unlikely to reappear soon. For over a decade borrowers enjoyed rock-bottom rate making mortgage borrowing more accessible to a wider group of borrowers.

But 2023 has seen this equilibrium turned on its head. As inflation soared around the world central banks have pushed rates higher and higher to try and reign in rising prices. This has had a direct consequence on the mortgage market, which brokers will be acutely aware of.

Typical repayments are set to rise by £2,900 for those remortgaging in 2024 according to data from the Resolution Foundation while inflation – although lower than previously – remains well above the Bank of England target of 2%.

Consumer group Which? estimates some 770,000 households missed mortgage or rental payments in July, as 2.4 million households missed essential payments in total.

In such a climate the mortgage business needs to be acutely aware of the pressures facing households and adopt a forward-looking approach in order to reduce the risk of consumer harm when making lending decisions.

Borrowers are now in the intensely difficult position of being locked out of the mortgage market despite low credit risks thanks to macroeconomic issues which aren’t of their own making.

This comes despite the fact many will have increased their earnings and potentially savings this year. Indeed, earnings growth has outstripped inflation for the first time recently, with the Office for National Statistics (ONS) reporting 8.2% wage growth in the three months to July 2023.

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Multiple income sources

It is therefore incumbent upon lenders to take a more tailored approach to underwriting mortgages. I feel strongly that firms have it within their power to ease the pressure on households who need help right now. 

In practical terms this means more attention to detail from providers when it comes to individual cases. It means looking at how a household’s income is structured and the nuances within that. 

West One frequently sees multiple income borrowers – such as from non-professional landlords – or homeowners with more than one job managed in sustainable hours. The same can be said for older borrowers with pension income, benefit income and other sources that might not fit neatly into a box. 

Self-employment has often made mortgage assessment trickier, and this is worse than ever thanks to the effects of the pandemic too. But it should not be a barrier to those who choose to earn a living this way, as long as the lender does the right due diligence, analysing trading histories even if they are shorter or show variations thanks to external events. 

Other major income sources that are routinely misunderstood are bonus payments, commission payments or overtime. All of these can factor in positively to an application if the borrower can prove they are earned consistently over time. Lenders just have to try to pay closer attention to the detail of it and help the borrower make the best case they can. 

The addition of regular income that is not just an individual’s “salary” into affordability tests could greatly increase their chances of getting a deal. It is surprising to see just how many would-be borrowers fail such assessment despite having more than enough income, just because it comes from a few different places. 

Lenders can adapt criteria for the environment we’re in now, and not remain stuck in a 2019 mindset because the world has changed enormously in a short period of time. Giving a more flexible approach to assessing borrowers, particularly for those who need choices away from the high street is essential, now more than ever. 

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