We need to talk about affordability in 2023

Posted on:
November 7, 2023
Posted by:
Bluestone Mortgages

Affordability has been a central concern on everyone’s minds, sparking many discussions within the industry over the past few months. But how knowledgeable are you about this critical topic? 

We aim to summarise everything you need to know about affordability — what it is, the factors influencing it, and best practices when supporting complex and vulnerable customers in a Consumer Duty world. Even if you are an expert on this topic, we hope you will still find a few gems in this post and would appreciate your feedback when it comes to your experience dealing with consumer affordability.  

If you know exactly what you need, jump to one of the following sections: 

What does mortgage affordability mean?

If you ever need a simplified way to explain affordability to your customers, this is it! Feel free to share this page with anyone who needs it. So, let’s go back to basics! As lenders, we are required by the Financial Conduct Authority (FCA) to assess whether your customers can repay the loan they wish to borrow, both in the short and long term. This is what’s known as stress testing, and it takes into account your customer’s income and debt, with committed expenditure, basic essential expenditure and basic quality of living costs. Mortgage affordability determines whether your customer can afford to keep up with loan repayments under the existing conditions and in the event of a significant change to their payment. Any other significant changes, like a job loss, cannot be factored in. As a lender, assessing this is crucial to prevent your customers from falling behind on payments, which could lead to the unfortunate consequence of losing their homes in a worst-case scenario and negatively impacting their credit scores. 

How is mortgage affordability calculated?

Overall, the mortgage affordability calculation considers acceptable net income and committed expenditures. In most cases the loan is capped at a maximum Loan to Income ratio. This can be anywhere from 3 – 5 times the income depending on the lender; with some lenders going even higher depending on circumstances. Some lenders also use an ONS affordability model to determine applicants’ affordability and LTV along with the applicant’s income. 

Committed expenditure:

At Bluestone Mortgages, we have integrated with Experian which allows us to digitally pull customers’ credit reports that shows us their committed expenditure. This allows us to get an accurate view of what clients are paying per month from Decision In Principle (DIP) stage and allows us to offer options so the client can get the most out of their affordability. In most cases, using this method has helped with customers’ overall affordability.


Criteria on completion:

Also, we base our lending criteria on completion, which can help borrowers save thousands in interest! We base our credit criteria on the completion date as opposed to the point of application. This gives your customers more flexibility with their finances and may provide that small window of extra time to get things in order. 

How does the Cost of Living affect affordability?

Although mortgage affordability is primarily based on your customer’s income and outgoings, many indirect external factors affect your customer’s affordability, especially in the wake of this post-mini-budget era, where inflation hit levels we haven’t seen since the 2008 financial crisis.  

Cast your mind back to the end of 2021 – not too long ago, right? That’s when we witnessed the start of frequent rate changes. The Bank of England steadily increased its interest rates (base rate) from 0.1% in December 2021 to 5.25% in August 2023. That’s a total of 14 consecutive interest rate hikes in a relatively short span. However, thankfully, they decided not to increase it at a meeting on 21 September 2023. Note that the base rate increases are tightly linked to the Consumer Price Index (CPI), which affects food, utilities and energy prices. 

All these significant economic shifts affect your customers’ ability to secure a mortgage. And for those already on a mortgage, it influences how they manage it. So, it is important to ensure you’re equipped to guide your customers through these changing times. 

Factors that affect a borrower’s affordability 

To this day, the cost-of-living crisis continues to squeeze people’s finances, which leads to growing concerns around affordability. And although Inflationary pressures from food and energy are easing over these last few months, interest rates are still at an all-time high. We recently conducted a research piece and found that 33% of all UK adults are concerned about how the inflationary environment will impact their future home-buying prospects.  So, how does this affect potential borrowers and their affordability… 

  • Low Credit Score: There will be customers experiencing financial difficulty for the first time and struggling to afford new loans or credit due to the burden of existing financial obligations.  
  • Existing Debt: In our recent research, we found two-fifths (21.9 million) of UK adults are worse off by £215 a month, amounting to £4.7 billion in total. This could cause some adults to default or cut back sharply on their spending, posing a risk to financial stability. 
  • Occupation: A recent study found that 4.5 million people in the UK are considering taking a second job to make ends meet. This will lead to more customers going down the complex-income route. 

If you’re wondering how you can serve this growing market but aren’t sure where to start – we can help. At Bluestone Mortgages, we don’t include credit scoring in the underwriting process like other lenders. Instead, we deal with applications on a case-by-case basis. Here’s a quick summary of our key features: 

    • No credit scoring 
    • Up to 4 defaults & 3 CCJs allowed in the last three years per applicant (unsatisfied) 
    • Ignore all CCJ’s & Defaults under £300 
    • Up to 2 missed payments per unsecured credit in the last six months 
    • We allow up to 100% of secondary income with six months history
Advising in this market and consumer duty best practice

Inflation, the inability to get onto the property ladder, and missing payments are among some of the many customer concerns in this market. There’s no denying that more customers will struggle to make monthly mortgage payments, and the vulnerability aspect of the Consumer Duty rules will be of importance during this period. For brokers like you, it’s a challenging time and opportunity for you to communicate more with your customers. Hence making sure they understand and are equipped with the knowledge to create effective, timely and adequately informed decisions. It’s also essential that we treat vulnerable customers fairly and ensure you are able to recognise and understand different characteristics of vulnerability and have systems and processes in place to help these customers. 

If you have a customer that you’ve identified as vulnerable, please ensure you make us aware of this within the application on our broker portal. Disclosure of these issues won’t negatively affect your customer’s application but will enable us to tailor our service where required and make sure we are better placed to provide the appropriate support to the customer. 

Wrapping up mortgage affordability

Now that you’ve read this, you should have a better understanding of mortgage affordability, the current state of the market and how you can better support your customers. This guide is just a starting point for discovering mortgage affordability. But there is much more to learn. If you want more information on the topic, contact our team at sales@bluestonemortgages.co.uk, who will gladly guide you to other resources.

Editor’s note: This post was originally published in September 2023.

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Bluestone Mortgages

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