The mortgage market has become ever more sophisticated in recent years, influ-enced by new entrants and changing market conditions.The view that property prices are increasing steadily over time, combined with low interest rates, has meant that borrowers can borrow bigger sums in relation to their incomes. The shift in earning patterns as customers move to contract working, self-employment and enjoy multiple sources of income, plus a requirement under MCOB for lenders to ensure that their lending is responsible, means that the mortgage market has developed beyond
traditional lending guidelines to meet both market and regulatory requirements. One of the key changes is the adoption of affordability as a technique for determining the amount that a customer can borrow. For many years, some specialist lenders have assessed individual cases on an informal affordability basis, looking at the individual circumstances of a borrower to see if there is scope to lend beyond the normal lending parameters. In recent months, many lenders have dropped the requirement for borrowers to meet income multiples in favour of an affordability calculator which is often combined with a credit score. This system has two main advantages – it provides the majority of borrowers with enhanced credit facilities (often with less need to prove income) and it offers lenders an option to automate much of the underwriting process, which cuts costs and means the lender can handle bigger volumes of business. The definitions of affordability vary from lender to lender and can cover both self-certification mortgages and, under the fasttrack schemes for mortgages with low loan to value, even standard lending. For self-certification schemes (only available to the self-employed or those employed but with multiple sources of income), some lenders calculate affordability using net disposable income while others utilise gross income. The cost of outgoings such as unsecured borrowings is deducted from the amount available and some lenders also adjust the amount that can be borrowed to reflect a mortgage applicant’s number of dependants. A few lenders will offer a higher level of borrowing to applicants with bigger incomes on the basis that they have a greater level of disposable income than applicants earning average sums. Fasttrack schemes assume that the applicant has the income they declared for the majority of cases but require proof of income for a sample of these. The question remains that with the potential for customers to borrow ever bigger sums, are lenders undertaking responsible lending or storing up problems for the longer term? For the most part, affordability lending is just that and takes account of the applicant’s personal circumstances more than income multiples ever could. Many lenders ask for a breakdown of an applicant’s income plus a signed declaration that the applicant has not supplied false details and that he believes he can service the loan. Most ask for proof of income from a small sample of applications (to monitor the quality of business submitted) and they will always query any application that does not seem right. The lender can assess an application for a mortgage not only on the amount that an applicant earns from his principal employment but can also use other forms of revenue such as bonuses or investment income. Lenders can also adjust loan amounts according to a particular applicant’s lifestyle. A couple without children and with a joint income of 40,000 can afford higher mortgage payments than a couple with a similar income but with two children to support and an outstanding car loan. The addition of credit-scoring to the underwriting process (particularly where this is automated) can also provide a degree of comfort to the lender that an applicant can afford the mortgage. On the other hand, while credit-scoring offers an extra level of reassurance to a lender, its automated nature means that some cases that could benefit from an affordability calculation get rejected while others that ostensibly pass the credit scoring are not really in a position to service the loan. Increasingly, the market for affordability is likely to polarise between the volume producers which seek to handle the more straightforward cases on a largely automated basis and the smaller, specialist lenders which can assess each case manually on its merits. The bigger lenders can handle the bulk of cases but the development of automated systems means smaller players can take on applications that do not fit well into the lending criteria of the bigger system-driven players. For example, sometimes a lender might accept cases rejected elsewhere on the basis of a poor credit score. It will then underwrite these cases manually, considering that the applicants represent a good credit risk. Conversely, there are rejected applications which might have been approved by automated underwriting systems but where manual underwriting revealed underlying credit issues. This approach, which more accurately reflects the borrower’s ability to pay, will enable today’s property owners to move up the housing market ladder while ensuring that the regulations are adhered to on resp- onsible lending.