Affordability questions to cause fireworks


March 28, 2014

Toni Smith, sales operations director, First Complete

There is much talk about the new affordability criteria under the MMR; as lenders start to reveal their requirements it is becoming clear that while some want more basic affordability information others want everything from the amount spent on lottery tickets to the cost of a haircut.

This raises a number of issues, at least one of which may well lead to a market distortion.  

The key issue is: will borrowers even have the information asked for by lenders? When asked for the amount spent on alcohol for example, will a borrower be able to pin point this amount amongst their grocery bill or the cash they draw out? Or take the amount someone spends on clothes, many people have a blitz and buy several items and then buy nothing else for months, making calculating a monthly expenditure something of a challenge.  

Additionally most people who are sensible with their money will spend at a time when they have money but cut back during more austere times as evidenced by the drop in retail sales over the past few years.

Discretionary spend such as that on clothes and alcohol also raises another issue: just how honest are a husband and wife with regards to their expenditure on such issues?  How many females really tell their spouse or partner exactly what they spend on shoes or getting their hair done, and how many males admit to just how much they spend on golf membership, a night out with the boys or drinks after work?  If they don’t admit it to each other it is unlikely that they will admit to it to a mortgage broker with their other half in the room.  

This is unlikely to be because they intentionally want to commit mortgage fraud but more because of the potential friction caused by their actual expenditure coming out in the open.  I expect that there will be many brokers who will experience a few fireworks in their office when forced by a lender to challenge their clients’ discretionary outgoings.

This leads me to the path of least resistance and potential market distortion.  Given the above information, there are likely to be many people who will not want to reveal such intrusive information even if they are single or completely transparent about their finances.  How much therefore, will they prefer to choose a lender who may not have the best rate but who asks for less information?  As a result, it could well be that brokers are put under pressure to place mortgages with the lenders who ask for the least information, compromising best advice  

This could well lead to some lenders getting significantly more business than others.   

The positive in this is that it may lead to more consistent criteria across lenders over time, but in the short term it could well cause a market distortion in favour of the lenders with the simplest criteria.

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