Strong competition means lenders have less room to manoeuvre on rates.
There has been a flurry of affordability changes in recent weeks as lenders begin to step up competition on criteria.
Brokers argue this is because pressure on lenders’ margins and strong competition mean they have less room to manoeuvre on rates, particularly at lower loan-to-values.
Coventry for Intermediaries made a raft of changes that it says could enable applicants to borrow more. These include allowing borrowers to disregard the living costs of any non-dependent adult staying in the property. The lender will also take a more flexible view on what must be included under ‘essential living costs’.
For self-employed borrowers, Pepper Money revealed that it will now base its affordability calculations for self-employed borrowers on their latest year’s net income instead of taking an average of the past two years’ earnings. The lender says the change will benefit business owners, entrepreneurs and sole traders who have seen their income increase in the last year.
Skipton Building Society has also tweaked its policy to be more generous to self-employed contractors. Brokers will be able to multiply the client’s day rate by five, then by 48, to determine their annual income. This will now be assessed as employed income, rather than self-employed income as was the case before.
However, this new income policy applies only to contractors who have a minimum of two years’ experience in their profession, at least one year’s contract history, plus a minimum income of £50,000 a year.
Association of Mortgage Intermediaries chief executive Robert Sinclair says: “Lenders cannot afford to go much lower on rate so they are having to look at affordability tweaks to see where they can make themselves more attractive to potential borrowers.”
But he warns that if lenders were to go too far in their changes it could become of concern to the regulator.
Sinclair points to plenty of anomalies that still exist across different lenders’ various affordability models.
“There is always a debate around ‘committed expenditure’ and what this should include. Some lenders still include voluntary pension contributions even though a customer could stop these if they lost their job or saw a drop in income.Besides, there is stress testing on top of this so in a way there is some double counting going on. Whether school or nursery fees are included is another variant. Some lenders will still view holidays as a committed expense.”
John Charcol senior technical director Ray Boulger says: “Lenders are constrained by the PRA rules, which say that no more than 15 per cent of their book can be over 4.5 times income. But there is flexibility in how income is defined, for example whether 50 per cent or 75 per cent of bonuses are taken into account.
“I see that there is scope for a lot more change in criteria, particularly regarding later-life lending, which is still being dominated by smaller players.”
