Mortgage Affordability – the biggest hurdle of 2023

Will affordability improve in 2024?

One of the biggest reasons for cases to stall after placement with lenders was down to old ‘affordability’ With high house prices and rates at current levels, even stretching out terms to near 40 years still doesn’t seem to be helping. But why is this? Simply put, it is because many lenders are still basing affordability on SVR’s + a margin. At the time of writing this, those and SVRs are around the 8% mark.

At such elevated levels it really is the few and not the masses that can afford their homes. Switching lenders may not be possible, and borrowing the right amount for that dream house may not be achievable. Ultimately this is stalling the market and leading to lower transactional levels. In fact, remortgages are at their lowest levels since 1999!*

We have seen lenders reprice down over recent weeks, which is really great news as this will reduce your clients' monthly payments. However Base Rate remains unchanged and many lenders base affordability on the SVR which is typically 3% above this.

The question is why do so many lenders still do this? The requirement to stress at 3% over base disappeared last year when the Bank of England (BOE) affordability tests were scrapped in favour of MCOB rules which ensure rises of 1% or 100 basis points would be affordable over the first 5 years.

Are lenders being overly prudent? Is there a belief that interest rates could rise further from where we are currently at?? With inflation somewhat under control (I, for one, am keeping my fingers crossed), all things look a lot more positive. A fact that appears to be backed up by the decreasing SONIA swaps. So, given this, will we see SVRs come down?

My view is yes and no. We may see some lenders reduce their SVR margin (squeeze down that typical 3% cushion) although this will reduce their profits. So, instead, they may simply leave the SVR alone and introduce a new method for new lending rather than hurting profits. Of course, we could wait for BOE to reduce base rate, but that could be a while!

It does seem like some change is in the air though. Santander, in an attempt to assist new borrowers, have moved away from stressing on SVRs and have now implemented a ‘managed rate’ which is lower than their SVR. This allows them to move as they see fit, rather than when the BOE move rates. This is an interesting move and I think other lenders will be watching keenly from the sidelines.

The great thing about this is that more cases should in theory ‘fit’ and the loan amount you requested should hopefully work! But this   is just one lender and it's not a huge decrease, so perhaps we shouldn’t get carried away just yet.

There is another option though, one that moves away from SVR’s, managed rates and fingers in the air methods... and that is affordability based on payrate. This is typically only available when clients take out deals of 5 years or more. The good thing here is that a payrate of say 5.5% will of course give a lot more borrowing power and 'affordability breathing space’ when compared to both an SVR and a managed rate model.

One lender that gives clients great borrowing power and affordability is Perenna. Its long-term fixed rates (20 to 40 years) remove all rate gambles and allow lending up to 6 x income subject to criteria.  And, importantly, affordability is based on payrates.

Longer term fixed rates may be an alien concept in the UK, but are commonplace in other well-established markets like America and many European countries. The reason long-term fixed rates haven’t necessarily worked previously is likely down to a lack of flexibility, long and expensive ERCs and the absence of recurring income (proc fees) for those who recommend them.

That’s where Perenna comes in. Perenna’s offering addresses all of these shortcomings. With a Perenna mortgage, your client can fix their monthly payments for up to 40 years with the ability to port or borrow more. The ERC is only 5 years and there’s trail commission for you when you review your customers’ needs. Your client can even PT onto a lower rate at the end of the 5-year period if rates come down!

Winning over brokers and changing hearts and minds to a more European concept may take some time and the positioning of long terms fixed with your clients will be key. If sold as a standard 35-year fixed rate, borrowers may be scared away. I, myself, don’t know what I will be doing in 3 or so weeks' time, let alone in 35 years! However, if positioned as a mortgage that gives long term stability with a short 5-year tie in this suddenly seems very different. Certainty with flexibility.  Who wouldn’t want a mortgage that you could stay on if rates went up, but could come off (and jump onto a lower deal) if they went down? That is like a 'get out of jail free’ card in monopoly!

Some other news that may be received with mixed feeling is terms of up to 50 years, on one hand the amount of interest paid will be high, however by taking a long term like this, young first-time buyers could achieve the dream of home ownership instead of a life in rented. Could 50 years be the new 25 in years to come? One to watch...

I’m sure 2024 will have lots of changes and plenty of surprises in store!

*source Remortgaging falls to lowest level since January 1999 - Mortgage Solutions

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