Summary

• The debate on taking previous rent payments into account when assessing someone’s eligibility for a mortgage has received significant interest following an e-petition with over 147,000 signatures.
• After regulation changes in 2014 lenders have had to use a calculation taking higher interest rates and essential household expenditure into account when assessing mortgage affordability.
• The biggest barrier to consumers getting on the property ladder is saving for a deposit – 68% according to the BSA’s Property Tracker (Sept 2017).

Assessing Mortgage Affordability

Whether rent can be taken into account when considering someone’s suitability for a mortgage is at the heart of the e-petition.

Mortgage regulation changed in 2014 and since then lenders have been required to use the process outlined in the infographic below (taken from the FCA’s Responsible Lending Thematic 2016).

Example of Simple Affordability Calculation

The customer’s household expenditure is generally calculated in one of two ways. Some lenders ask the customer to provide details of expected monthly spend on certain goods and services. Alternatively some firms rely on modelled household expenditure figures based on the customer’s family structure, income and sometimes factoring other details, such as where the customer lives. The stressed interest rate is the introductory mortgage rate plus a percentage to check affordability if rates increase.

To safeguard against the effects of expected interest rate rises, the FCA requires firms to assess affordability against a higher rate that might be payable within five years. Firms must take into account market expectations and the FPC’s prevailing recommendation on appropriate interest rate stress tests. Each lender can reach its own view on the stress rate used but they must be able to justify this.

Barriers to Property Purchase

‘Property Tracker’, the BSA’s quarterly consumer survey, found that in September 2017 68% of respondents said raising a deposit was the biggest barrier to property purchase, while 45% said affordability of mortgage repayments was a barrier.

The Government Response on the E-petition & House of Commons Library Briefing

The House of Commons Library has produced a briefing ahead of the debate. In addition the Government has responded to the e-petition which is a useful summary of the issues. This says:

In April 2014, the independent Financial Conduct Authority (FCA) put in place new regulations for mortgage lending. These were aimed at addressing the problems previously caused by poor quality mortgage lending, such as borrowers falling into payment difficulty and, ultimately, losing their home.

The changes included the principle that mortgages should only be advanced where there is a reasonable expectation that borrowers can repay. All lenders must now conduct an affordability assessment which includes an income and expenditure analysis, and the lender must obtain evidence of that income to support this assessment.

A record of meeting rental payments is not sufficient in itself to demonstrate the affordability of a mortgage over the lifetime of the loan. This is because the affordability assessment must take account of a much wider range of factors. These include:

• the borrower’s income;
• the borrower’s committed expenditure (for example – credit commitments on any secured and unsecured loans and credit cards);
• the borrower’s basic essential household expenditure (for example – utility bills, council tax and building insurance);
• the borrower’s basic quality-of-living costs (for example – clothing, other household goods, personal goods and basic recreation); and
• the ability of the borrower to meet payments in the event interest rates were to rise.

It is important to be aware that home ownership brings a number of additional expenses that may not be incurred when renting, including maintenance costs and buildings insurance. Before extending a loan, lenders must satisfy themselves that a borrower will be able to meet these additional on-going costs when considering a mortgage application.

Many lenders also use information from Credit Reference Agencies (CRAs) when considering mortgage applications. This is because previous customer behaviour, in terms of paying back debts, tends to be a relatively good predictor of future behaviour. Therefore if prospective borrowers have a history of good financial management it can improve their chances of obtaining credit.

Beyond the FCA’s requirements, decisions around the availability of individual mortgage loans remain commercial decisions for lenders, and the Government does not seek to intervene in these.

Whilst one lender may be unable to offer a mortgage, being denied a mortgage from one provider does not preclude a customer from being offered credit elsewhere. There are a wide variety of mortgage products available in the UK and prospective borrowers may benefit from shopping around.