As inflation and the base rate continue to increase, so does the issue of housing affordability, which is rapidly climbing the agenda of industry challenges.
After a significant period of low rates and low inflation, the sudden spike came as a shock, with financial markets and individuals struggling to find balance in a more volatile environment.
The cost-of-living crisis continues to squeeze people’s finances from all angles, including the cost of borrowing, which has led to the growing concerns around affordability.
Latest research from House Buyer Bureau has found monthly mortgage costs are up to 60% higher than they were just 15 months ago, when rates started rising.
There is no single answer to this problem. With prices not falling as many predicted, the issue of affordability will remain
At the same time, the latest housing affordability report from the Office for National Statistics (ONS) shows full-time workers in England can expect to spend more than eight times their annual earnings when buying a home.
So where does that leave homeowners who are stuck on high standard variable rates or have fixed deals coming to an end? And what about those who are trying to get on the property ladder in the first place?
Paradigm director of mortgages Richard Howes says: “There is no single answer to this issue, as I see it. With property prices not falling as many predicted, the problem of affordability will remain.
“Lenders in the mainstream are trying to marry competitive rates with an affordability model that satisfies their risk view, and that’s not always easy.
In the private rental sector there is a real issue with not enough good rental homes available
“It’s clearly not all about rate; indeed, rate will now only get you so far. The case must fit, obviously.
“Given Q1 2023 has proved resilient in terms of demand from customers, perhaps we will see lenders start to relax slightly and look to move in certain areas, such that their credit scoring allows more flexibility when assessing customers’ ability to pay.”
Howes adds that, although there’s an opportunity for specialist lenders to increase their market share, some mainstream lenders could tweak their risk appetite to be able to take on cases that are only slightly ‘off centre’.
Speaking from a specialist lender point of view, Bluestone Mortgages sales and marketing director Reece Beddall comments: “We are seeing a growing number of people struggling to either get onto the property ladder or make their monthly mortgage payments.
The changing scope of vulnerabilities to consider will be the real acid test once the Consumer Duty comes into force in July
“A recent report from Unum shows that around 4.5 million people in the UK are considering taking a second job to make ends meet. This will ultimately result in more customers going down the complex-income route as lenders with a manual approach to underwriting look to take a view on customers’ multiple income streams.”
Beddall adds: “Bluestone doesn’t use a traditional ONS affordability model. Instead, we are able to use clients’ bank statements to take a view of their expenditure, rather than use benchmark figures. In the majority of cases, this has helped with customers’ overall affordability. However, in the current environment, rising rates are naturally going to affect applicants’ maximum loan value.”
As a result, the market is seeing higher LTVs, more mortgage arrears, more second charge lending and a rise in equity release.
LiveMore head of intermediary sales Phil Quinn says: “We lend to people aged 50 to 90-plus and we’re certainly seeing an increase in applications due to the cost-of-living crisis, with a noticeable rise in debt consolidation cases.
“Another growth area is the Bank of Mum and Dad/Granny and Grandad. They want to help offspring onto the property ladder.
It’s clearly not all about rate; indeed, rate will now only get you so far
“Affordability should not be about just ‘X’ times salary; we base our affordability criteria on all income. In fact, some of our borrowers don’t even have a salary but they do have pensions, or income from investments or property they rent out.”
Add the above to factors such as the ending of the Help to Buy scheme and it follows that affordability pressures could lead to a rise in demand on the rental sector, which is currently facing its own challenges.
Landbay managing director for intermediaries Paul Brett says: “We need to build more homes for a growing population, but this country is nowhere near reaching the 300,000 annual target. However, the government has now downgraded that figure from ‘mandatory’ to ‘advisable’, so we are unlikely to see it reached at all.
“In the private rental sector there is a real issue with not enough good rental homes available. Demand far outstrips supply and property is often let out as soon as it is advertised. Many people can’t afford to buy, so have no choice but to rent.”
Affordability should not be about just ‘X’ times salary; we base our criteria on all types of income
Finally, there’s the issue of vulnerability. In contrast to previous economic downturns, lenders now have a greater responsibility towards the financial welfare of their customers.
MorganAsh managing director Andrew Gething says: “Firms are identifying the proportion of consumers with vulnerabilities at between 40% and 80%, depending on demographics.
“While many across financial services are fully committed to supporting vulnerable customers, the changing scope of vulnerabilities to consider will be the real acid test once the Consumer Duty comes into force in July.”
This article featured in the April 2023 edition of MS.
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