The parallel universe of mortgage affordability

It’s hard not to think you are sometimes living in a parallel universe when it comes to the UK mortgage market.

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Pad Bamford | AmTrust Mortgage & Credit
14th May 2019
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"It must take a huge amount of responsibility for the introduction of affordability assessments which it now deems too strict for potential younger homeowners."

Take, for instance, the FCA’s latest discussion paper on ‘intergenerational differences’ and its call for greater flexibility in the mortgage market, specifically when it comes to helping younger people onto the property ladder.

The paper looks at lenders’ affordability assessments and suggests they are somehow too rigorous and strict for a borrower cohort which it says is much more likely to be on zero hour contracts, or self-employed, or dipping into work then education then back to work.

On the face of it, this might seem like a common-sense approach from the regulator were it not for the fact that it must take a huge amount of responsibility for the introduction of affordability assessments which it now deems too strict for potential younger homeowners. You would have difficulty in making this up, and lenders might well look at this response from its regulator and conclude it is being placed between a rock and a hard place.

On the one hand it is told not to go too far up the risk curve in terms of its lending decisions, and then a few years later is told that it is not being flexible enough and (essentially) it should go further up the risk curve in order to help those borrowers who they were originally told not to give mortgages to because they were deemed too risky to have one.

Now the FCA might say that the difference here is that it’s talking about the involvement of friends and family within the mortgage decision in order to mitigate that risk but I would suggest that it’s going a few steps further than this, especially when it comes to lenders’ ability to be ‘flexible’ when it comes to borrowers who might – ordinarily – not meet the affordability standards it sets.

Indeed, one wonders what the reaction of the FCA would be, a few years hence, should it find that large numbers of first-time buyer borrowers – who had secured their mortgage via a new, greater degree of flexibility – suddenly found themselves in arrears or having their homes repossessed.

Would the regulator, at this stage, accept an argument from lenders which was essentially, “You told us to be more flexible”?

There is not a lot of sympathy for lenders at the best of times but you can’t help feel a twinge for the lending community who appear to be told one way to conduct business, only then to have the regulator apparently going back on this.

And, of course, while having a parent involved as a guarantor might push down the risk, there’s no guarantees they will be willing to keep this going or indeed be in a position to bail out their offspring should they not be able to keep up with their future payments.

Lenders might have the guarantee or a cash amount from the parent but would they really want the negative PR of using that back-up? The market often seems to overlook such circumstances when the parent or guarantor is genuinely called upon to help out the borrower.

Don’t get me wrong, I’m all for support for first-time buyers and, in particular, helping those who only have small deposits to secure a high LTV mortgage and get on the ladder. However, I’m not convinced that asking lenders to go way beyond their affordability assessment levels for younger buyers is the right way to do it, and I’m also not convinced that the regulator wouldn’t throw the book at lenders whose accounts move into arrears because they adopted such practices.

Lenders are already in a very tricky position in this market. Many have already introduced a far greater degree of flexibility into their practices, but we should not be insisting they lend to those who cannot afford it, regardless of the parental backing they may (or may not) have.

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