Salary-based lending to be thing of the past
The A&L study, undertaken by the Centre for Economic and Business Research (CEBR), analysed the use of income multiples and examined how homeowners are likely to be affected by the use of affordability-based lending criteria as more lenders move towards it.
The findings showed that levels of disposable income have risen. The report looked at a number of different household types – both single and dual income households and those with and without children – and using the average income and expenditure for each household type, compared the maximum mortgage lending under income multiples and typical affordability calculations.
Key findings of the report suggest income multiples are a ‘clumsy way’ of assessing the level of mortgage payments people can afford; couples with two incomes, both those with and without children, are likely to be the biggest beneficiaries of an affordability-based approach; most types of household can potentially afford to put a higher proportion of income towards their mortgage payments than income multiples would give.
Stephen Leonard, director of mortgages at A&L, said: “Affordability provides 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 means 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.”
Ian Crampton, sales director at Ferndown Limited, said: “Affordability is the route lenders are increasingly following but they need to be careful when taking account of affordability with shorter-term lower lending deals.”