There can be no industry other than banking that is so patronising in the way it treats it customers. Utilities come fairly close, but in order to be thoroughly nannied, try applying for a mortgage. In the thirty odd years since I opened my first mortgage brokerage, now is probably the worst time to try and get a loan to buy a house. It is still possible, but the processes that are now in place make it an entirely unpleasant affair. I was talking to a mortgage broker friend, who is still practicing, and he said that the job was now akin to that of a doctor managing a patient through a difficult course of treatment rather than helping someone achieve the purchase of a house.
A few years ago the whole mortgage industry was subject to the Mortgage Market Review. A whole new set of rules from which lenders now have to comply. Many of the new rules were long overdue and welcome, such as stricter rules on the qualifications needed in order to arrange a mortgage. But, by far the most contentious area though is the way a lender assesses affordability when determining how much they are willing to lend you. And that is where the culture of patting you on the head, saying “there there, it’s for your own good that we have turned you down” is getting more than a few people a tad annoyed.
Nobody is saying that responsible borrowing shouldn’t be based on the ability to repay the loan, a responsible lender should take into account both the financial history and current commitments of the applicant. But this is where I start to see some blurred lines. A lender will ask for at least six months bank statements, I don’t have a problem here, it’s the right thing to do. However, I see a difference when the statements show a commitment to a car personal lease plan that is costing £150 a month and is a contractual obligation which impacts on affordability because you can’t get out of it for a number of years, and the fact that the statement shows you spend £15 a week on a takeaway.
For as long as I can remember, people’s spending habits have changed when they take on a mortgage, and things like the weekly takeaway are first in the firing line when a tighter budget is needed. If you factor in the reality of an applicant currently paying more in rent than the proposed monthly mortgage repayment, then you can see why there is frustration when a lender declines an application on the grounds of affordability.
Which brings me to the lenders own interpretation of affordability.
There has been a trend for first time buyers to move away from the traditional 25 year mortgage and take loans of 30 years, or even more. The obvious reason for this is the lower monthly cost, which, at one level would seem to satisfy the more stringent affordability costs. But, while achieving this, it actually costs a lot more in the long run. So just how should affordability be defined?
The new rules put some considerable weight on not only the affordability at the start of the loan, but affordability should interest rates go up, so reducing the monthly cost by extending the loan period will actually have the effect of making the monthly repayments affordable in the event of a rate rise. Interest rates are incredibly low at the moment, and should they go up to 5% they would still be historically low. But what an effect it will have on repayments. A quick look at the table below will show that a £170k mortgage over 25 years will cost £719 a month at 2% interest. If that were to go up to 5% then the monthly repayment would rise by over £250 to £982 per month. So what happens if the loan is 30 years instead of 25? Well, on the face of it the monthly cost at 2% is now £628 and a rise to 5% would make it £912. A noticeable saving indeed.
But wait a minute, look at the total amount you will actually pay back. At 2% interest the total you will repay over 25 years is £215716, but over 30 years it will be £226207. An extra £10491! At 5% interest you will pay an extra £33683!! So, here’s the conclusion. In order to save you money, you will pay a lot more, and it is perfectly within the guidelines set out regarding affordability. In short, the current trend toward longer mortgage terms seems to be saying that the extra £10K which you will pay is more affordable than the extra £70 per month it would cost you to stay at 25 years.
|Interest Rate||Monthly Repayment |
|Monthly Repayment |
|Total Repayable after 25 years||Total Repayable after 30 years|
Please treat the above table a guide, it’s a good guide, but in reality the exact figures will vary slightly according to an individual lender’s application of interest rates.