Being able to afford mortgage repayments has become a lot more difficult following a tumultuous time for our economy. Darren Polson explains the hurdles to affordability, and how they can be conquered
There’s no doubt that since the mini budget last year and the subsequent rapid rise in interest rates a range of issues has knocked the confidence of many potential homebuyers.
One of the main concerns is, unsurprisingly, affordability.
The move from incredibly low rates of between 1% and 2% up to much higher averages of 5% and 6% was bound to have a knock-on effect and it’s arguably the root cause of why we saw a sharp reduction on house buying activity during the last few months.
With inflation remaining high and the wider cost of living still on the up, many would-be buyers have either put any decisions on hold or given up altogether.
Higher mortgage rates
However, there may well be a glimmer of light – during March we saw one of our busiest months for mortgage applications and completions.
Now there could be a number of reasons for this, but it seems that people are getting used to an environment of higher rates and adjusting their budgets accordingly.
As ever, whether we were dealing with low rates or higher rates, it has always been very important that anyone looking to borrow by way of a mortgage ensures that they can in fact afford to do so.
Critically, it was always also critical to view the financial position in times of financial stress.
Certainly, there will be many people who will already be experiencing this increased stress, particularly those on variable or tracker rates. But a central point to note is that lenders have not changed the way they view affordability assessments for any borrowers, albeit each lender will have its own way of calculating affordability.
Rising cost of living
What has changed of course, is rising costs.
Most lenders will use ONS statistics which show average costs for normal everyday goods and services such as food, clothing, fuel and childcare.
Lenders will also look to ‘stress test’ your ability to repay the mortgage which will take into account the effect of rising interest rates or changes to your individual circumstances.
In terms of general criteria, lenders will look at your salary, outgoings, credit history, residency, property type and other factors – all of which will form the foundation of their assessment before making an offer.
Whilst to some this may seem a drawn-out process, it’s always important to make clear that lenders want to lend, that’s how they increase business. It’s also in their interests as much as yours to do all they can to lend responsibly.
Invalid Agreement in Principles (AIPs)
With prices rising so quickly, we have also in recent times experienced a relatively new phenomenon when it comes to a specific part of the mortgage process – an Agreement In Principle (AIP).
An AIP was an informal assessment by a lender which would give you a figure you could realistically borrow, albeit this was not a final decision to lend. This would allow you to then begin your search for a property.
In times gone by, when prices were stable, the decision on an AIP basis would likely still be good for two or three months.
However, in the current climate, we have now seen instances where an AIP provided one month was no longer valid in the following month. With prices rising quickly, lenders have reassessed affordability based on the new cost of living figures.
On the plus side, we are beginning to see both lenders and house builders providing new incentives to try and make life easier.
Skipton, for example, has recently announced a 100% mortgage aimed at those with a proven history of rental payments and this may well lead to other lenders either following suit or introducing their own deals.
Furthermore, many builders are trying to stimulate the market by offering packages for those buying new build homes.
Examples of these are anything from making a contribution to your mortgage for a year, to providing a range of fixtures and fittings for free.
Ultimately, affordability will always be a core consideration when buying a new home and the best way to maximise your chance of obtaining a mortgage is to seek the advice of an independent mortgage broker and keep in regular contact with them.
Darren Polson is head of mortgage operations at Aberdein Considine
