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Did you hear about the mortgage affordability test?

by LLP Editor
1st Mar 22 12:35 am

In 2014, the Financial Policy Committee (FPC) introduced stricter mortgage lending and affordability checks to avoid a repeat of the financial crisis.

In a consultation, published recently, the FPC is seeking the views of interested parties on the proposal to withdraw the affordability test. 

The consultation will close on 6 May 2022 after which the responses will be considered by the FPC.

Commenting, Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “Affordability has been a perpetual issue for wannabe homeowners for many years, and while loosening the mortgage underwriting standards might ease their plight, lenders’ approach to affordability will continue to vary. As such, it is unlikely that six times income multiples will be offered by lenders across the board.

“Unwinding these measures amid the cost-of-living crisis run the risk of people biting off more than they chew financially to purchase a property. This could be a particular issue among first-time buyers – many of whom have seen their desperate efforts to buy thwarted by runaway house prices and the cost-of-living squeeze on deposit building. So, any changes should be approached with a significant degree of caution.

“Rather than loosen affordability, lenders should take into consideration factors that demonstrate an affordable budget. Many prospective buyers pay multiples of a mortgage payment on rent but are still viewed unfavourable by mortgage lenders.

“The credit scoring system isn’t perfect – yet they are too often treated as just a measure of fact. It can overlook some components, such as telecom and utility payments as well as subscriptions to digital entertainment services like Netflix and Spotify and other digital entertainment payments that might include a broader swath of people.

“Allowing mortgage applicant to enter information about their regular spending, such as payments to savings accounts, Council Tax payments, and digital entertainment payments could provide a broader overview of an individual’s financial position.”

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