Tackling affordability challenges

Tom Denman-Molloy, intermediary sales manager at Mansfield Building Society, explores why affordability challenges remain despite increased market stability and the flexible solutions available to support residential borrowers.

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Tom Denman-Molloy | Mansfield Building Society
17th January 2024
Tom Molloy Mansfield BS
"It is still important to remain mindful of the affordability challenges that many borrowers will continue to face in the higher interest rate environment as we enter a new year."

During times of economic uncertainty, finding ways to address the affordability challenges facing mortgage borrowers is crucial. The last couple of years have been a difficult time for homeowners, with the cost-of-living crisis, soaring inflation and rising interest rates leading to a squeeze on disposable income and a tightening of purse strings in many UK households.

Following the news that inflation dropped sharply to 4.6% in October however, coupled with the fact that, at the point of writing, the Bank of England base rate hasn’t moved since August, there are signs that rates may have reached their peak and that the economy is beginning to stabilise.

These factors combined will come as welcome news for those borrowers who have found themselves facing affordability constraints over the last 12 months. For many, 14 consecutive interest rate rises since December 2021 has significantly driven up the cost of borrowing and made securing an attractive rate on a mortgage increasingly difficult.

Challenges remain despite the increased stability

With all signs pointing to an easing of pressure in the market however, it is still important to remain mindful of the affordability challenges that many borrowers will continue to face in the higher interest rate environment as we enter a new year.

Although interest rates are stabilising, they are still nowhere near the historically low levels seen in recent years when many borrowers will have taken out a mortgage. Therefore, finding ways to help these borrowers address any affordability challenges they may encounter when taking out a mortgage is crucial.

It is against this backdrop that Mansfield Building Society has relaunched its range of residential mortgages designed to make home ownership affordable over the long-term and not just for the initial product term by including a discounted follow-on rate that comes into force after the initial rate across its Family Assist, shared ownership, retirement interest-only, prime and Versatility ranges.

The follow-on rate works by enabling borrowers to secure a discounted rate of 1.74% below the society’s standard variable rate (SVR) at the end of the initial term, which would currently stand at 7.15% variable rather than the 8.89% SVR.

The offer of a discounted rate for the remainder of the mortgage term without any ERCs on the follow-on rate, has been designed to support borrowers’ mortgage ambitions, with the aim of striking a better balance between purchasing power and affordability.

By offering greater flexibility around affordability stress testing, those borrowers with products linked to the lifetime discount will continue to pay a rate well below the SVR for the duration of the mortgage.

This, combined with access to versatile lending criteria makes homeownership a more affordable reality for many borrowers.

Supporting affordability through the overall cost of borrowing

This is especially important in the current economic climate where affordability stress tests are crucial in helping to identify how borrowers can cope in a rising interest rate environment and are proving incredibly useful in preventing arrears.

By offering a solution that can work alongside stress testing affordability measures, it is hoped the follow-on discount will provide a solution that will prevent the borrower having to go onto a disproportionately high rate.

Figures from UK Finance show that 1.6 million borrowers are expected to come off fixed rate mortgages in 2024, with the majority of these likely to experience varying degrees of rate shock when it comes to remortgaging.

Offering a flexible solution that supports residential borrowers by making the cost of borrowing more affordable in the long-term will hopefully go a long way to easing their affordability challenges.

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