A specialist approach to talking affordability
Clare Jarvis is acting sales director and head of national accounts at Pepper Money
When do you choose a specialist lender for your clients?
If your client is turned down by a high street lender, because of a failed credit score, the specialist market is likely to be your first port of call. What if your client passes the credit score, only to find out that a mainstream lender cannot lend them the loan size they want?
In some situations, a specialist lender could provide a viable and affordable alternative for your client, not because they have failed a credit score, but because of affordability. This isn’t to say that specialist lenders take a more relaxed attitude to affordability, but that they can give more personal consideration to a borrower’s income.
An automated high street approach, on the other hand, may be less suited to calculating affordability for clients with complex income structures and may impose limitations on the level of additional or variable income they include as part of their calculations. Specialist lenders that use individual underwriting can be better equipped to consider contractors, company directors, people earning significant bonus or overtime and applicants with multiple types of income, including investments and different sources of employment.
It is this approach that could help your client to secure the loan amount they need.
The affordability issue
According to the latest research by the Institute for Fiscal Studies (IFS), even with a 10% deposit, only around 60% of young adults are able to borrow enough to buy even one of the cheapest homes in their area.
This compares to 1996, when more than 90% of 25 to 34 year olds with a 10% deposit would have been able to purchase a house in their area if they borrowed 4.5 times their salary.
The IFS say that barriers to homeownership are particularly high in London where – even with a 10% deposit – only one in three young adults could borrow enough to purchase one of the cheapest homes in their local area. Back in 1996, 90% of young adults in London could have done so.
A growing gap
After adjusting for inflation, average house prices in England have risen by 173% since 1997, according to the IFS report, compared with increases in young adults’ real incomes of just 19%. As a result, the share of 25 to 34 year olds who own their own home fell from 55% to 35% between 1997 and 2017.
The IFS adds that rising property prices relative to incomes have also made it increasingly hard for young adults to raise a deposit. In 2016, around half of young adults would have needed to save more than six months of their post-tax income to raise a 10% deposit on one of the cheapest properties in their area, compared with just one in 10 in 1996.
The report says house prices differ a lot more around the country than the incomes of young adults. This makes it much harder for young adults in London to buy, compared to those in other parts of England. In London, 95% of young adults would need to save at least six months’ income for a 10% deposit on an average priced home in their area, compared with just over half in Yorkshire and the North East.
During this period when house price growth has exceeded the rise in average incomes, the make-up of those incomes has also evolved. The rapid growth of self-employment has been a pronounced feature of the UK labour market in recent years, with the number of self-employed workers increasing from 3.3 million people (12.0% of the labour force) in 2001 to 4.8 million (15.1% of the labour force) in 2017.
Part-time employment has also been on the increase. In 2010 there were 7.9 million part-time workers, compared to 8.5 million in January 2018, and ONS data indicates people working on a part-time time basis are more likely to earn additional sources of income that they might want to include as part of a mortgage application.
The rise of the gig economy and freelance or contractor work has also contributed to a shift in the way that people earn their living. The cumulative effect of all of these changes is homebuyers now rely on a more diverse selection of income sources, which can make it more complex for a lender to accurately establish affordability.
As a result, more borrowers could benefit from a lender that is able to take an individual approach to their circumstances at a time when it is more important than ever before for borrowers to make use of all of their earnings to demonstrate affordability.
Complex income? Think specialist
If you believe specialist lenders are an option for failed credit scores only, think again. In the right circumstances, a specialist lender that is able to assess their individual circumstances could be the right choice in accurately considering all of their earned income and helping to overcome the affordability challenge.