Mortgage borrowing based solely on a person's income will become a thing of the past Alliance & Leicester (A&L) claims.
The lender which has commissioned a study into lending activities says the use of income multiples is a clumsy way of assessing the level of mortgage payments that people can afford. Meanwhile couples with two incomes are likely to be the biggest beneficiaries of an affordability based approach to mortgage lending, something which A&L argues is becoming more commonplace among lenders.
A&L also argues that - based on average incomes – most types of household could potentially afford to put a higher proportion of income towards their mortgage payments than income multiples currently allow. This, it says, is because average disposable incomes have risen meaning borrowers have a greater amount of income to service their mortgage debt.
The report identifies what it refers to as the “tipping point” – where affordability based calculations start to offer larger mortgages than the income multiple approach as income increases. These typically allow borrowers to take a loan of an additional £14,000 for a single person with no dependants, £28,000 for a single person with dependants, £19,000 for a couple with one income and no dependants and £28,000 for a couple with one income and dependants.
More specifically a home with an average gross income of £35,120 will be able to afford to pay an additional £1,462 a year towards their mortgage under affordability calculations over and above what simple income multiple will allow them to borrow, says A&L. Therefore the affordability calculation allows the borrower a greater mortgage based on their ability to pay a greater amount per year towards servicing the loan. The “tipping point” is the point at which the affordability calculation allows the borrower to go beyond the level they would be allow to borrow under income multiple calculations.
Stephen Leonard, director of mortgages at A&L, says: “Affordability provider a more responsible approach to lending as it considers an applicant’s individual circumstances – those who are debt free will benefit the most.
“Lenders have responded to changing circumstances. The move towards affordability based lending mean than more people will get a helping hand onto the property ladder – and homeowners will continue to be able to ‘move up’ as their incomes rise.“
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