Stricter affordability criteria impacting borrowers

Affordability is certainly a concern and it is becoming more difficult to get people the borrowing they want. With increased costs for food and energy, the ONS data used by many lenders has gone up and therefore the amount that can be borrowed is less. Higher interest rates means stress tests are higher, too, and this is squeezing affordability for the consumer. Lots of lenders are now looking at like-for-like mortgages more favourably than someone that needs to borrow more, but it is certainly becoming more difficult to get the level of borrowing some people want.

Affordability has changed a lot since even before the mini-Budget. Lenders need to take into account the cost of everything, so with inflation being where it is, this means lenders need to take higher costs into account. Lenders generally use ONS data to build their calculators and, as this increases, their affordability criteria get more strict. Also, lenders need to do a stress test on the interest rate that they are providing, so with rates now significantly higher, too, it makes affordability tighter. Children do add significant costs on affordability calculators as they are obviously another committed expenditure for a parent and need to be considered. Lots of landlords are also struggling to refinance due to the stress tests now being applied to buy-to-lets. Some people do also struggle to refinance, especially if they have maximised things the first time around, or have had children and not much change to income since they first bought, for example.

Lenders have certainly tightened up their affordability calculations with the recent rises in the cost of living. However, if borrowers are looking to remortgage on a pound for pound basis there are still generous income multiples available from lenders such as Santander and Nationwide. The difficulty comes when clients are looking to consolidate debt or when they have significant debts in the background. Lenders are taking a more cautious approach in relation to these customers and they may find that their options are somewhat restricted because of this.

Increased affordability criteria have indeed affected applicants' chances of obtaining the level of borrowing required. As a Catch-22 to this situation, lenders are modelling affordability better if applicants fix for 5 years, however with the current rate set available it isn't good advice to tie clients in for this longer period, the idea being fix for as short as possible to hopefully escape to a better rate later. Remortgages are equally suffering from the above situation and the cost of living crisis expenditure. It could be time for a same borrowing amount amnesty from these stricter calculations.

Strictly speaking lenders haven't tightened up their affordability criteria, the rules haven't been made tougher, but the figures now being fed in have increased; food, energy and interest rates have all risen sharply. In fact, a number of lenders have relaxed a few of their rules in order to try and compensate, to a degree, for these increases so they can continue to help as many people as possible. Many clients I am speaking to have already come to terms with the fact that when they remortgage the cost of their mortgage will be increasing and we're talking about how best to manage that increase. For a very few these increased costs rule them out from remortgaging to a new lender, but even then, most lenders have options for existing borrowers that avoid them being forced onto the lender's standard variable rate.