MBT Affordability Insights: Debt and mortgage affordability
“Some lenders post their debt-to-income ratio for brokers to check, but it usually only shows up at the DIP stage.”
Most lenders have a “debt threshold” above which affordability drops significantly. This debt limit varies significantly between lenders and even between applicants, depending on the total income involved. Even with an income of over £100,000 this threshold can be surprisingly low and of course depends on overall creditworthiness.
Credit card debt can be particularly sensitive to the relationship between available credit limits and actual debt levels. So if a customer has reached or is close to their limit, it is likely that they have a lower credit rating. This is likely to increase in the coming months as borrowers build larger balances on their cards and not all lenders will automatically increase borrower limits. The other problem is that many affordability calculators don’t take this into account. It often doesn’t appear until the DIP phase, so it’s difficult to predict exactly.
Another problem is not only the amount of debt, but also the relationship between this and total income, the so-called debt-to-income ratio. This can easily lead to a rejected case and usually occurs at the DIP stage at the earliest. Some lenders post their debt-to-income ratio for brokers to check, but it usually only shows up at the DIP stage. One or two lenders actually build it into their affordability calculators, which is very helpful.
Rescheduling to pay off debt is likely to become more common as customers feel the need, but this can come with a number of problems. Many lenders set maximum LTV limits for debt consolidation (typically 80% max), and both of the above scenarios come to the fore for this type of debt restructuring.
Some of the big lenders assume that the debt will be resumed upon completion and are therefore leaving it as part of their sustainability calculations anyway. Others just don’t have an appetite for these types of customers and set the bar very high. However, there are a number of lenders who do not share the same level of debt consolidation concerns and are happy to help in this scenario. These lenders are likely to be busier in the coming months.
With higher levels of debt and a general funding squeeze, some customers will inevitably default on payments, which will be reflected in their credit records. This could pose entirely new challenges for customers and lenders alike. We’ll have to wait and see how everything develops.