Borrower affordability has become a growing challenge in the UK over the last few years, as rising interest rates, high inflation and increased living costs have placed significant pressure on household incomes.
This has led to more homeowners feeling the financial squeeze, with some struggling to meet mortgage repayments and general living costs, while others have been forced to make significant cutbacks to the way in which they live their lives.
The challenges around mortgage affordability look set to remain in 2025 and beyond, as interest rate fluctuations, stagnant income levels and high house prices continue to exacerbate longstanding affordability issues.
Addressing these affordability challenges has been a key priority for lenders over the last 12 months, many of whom have sought to implement strategies and enhance lending criteria to help support borrowers to maintain financial stability and buy a home.
The old-school way of assessing mortgage affordability no longer fully serves the needs of every modern-day borrower, as a growing number have multiple or varied income streams; will live and work for longer than their parents and grandparents; and buy their first home much later in life.
This means lenders need to work closely with the intermediary market to understand what challenges their clients are facing and adapt mortgage products accordingly so they allow more borrowers to access the property market.
As a lender who actively engages with our intermediary partners, we continuously seek feedback that highlights the borrower’s concerns, helping us refine and evolve our proposition to better serve their needs. Most recently, this involved increasing the LTV on our 5.5x income multiple calculation from 85% to 95% to provide greater borrowing potential for residential borrowers who meet our lending requirements.
The enhancement provides greater flexibility for many borrowers, especially the self-employed with only one year’s accounts and higher-income applicants seeking more flexibility in their mortgage options.
Greater flexibility around the underwriting process is important when it comes to improving affordability, which is why we also plan to extend the types of income accepted across certain products. This will enable borrowers to include income earned from overtime, bonuses and commissions in their mortgage application, up to a maximum 75% LTV. Borrowers working a second job can now also include 100% of the income earned from their secondary occupation, irrespective of whether it relates to their main occupation.
As well as enhancing lending criteria, there are many other products specifically aimed at helping borrowers facing affordability challenges already in the market. Government-backed schemes such as shared ownership, discount market value and First Homes mortgages, for example, have all been created to help borrowers overcome affordability hurdles by purchasing a home at a reduced rate.
Products like joint borrower sole proprietor (JBSP) mortgages are also growing in popularity, enabling borrowers to boost their borrowing power by combining the incomes of up to four family members to purchase a property.
This can be an extremely helpful way for parents to support their children’s homebuying aspirations, without having to gift a lump sum for the deposit. It can also prove a more affordable solution in the current climate as they can use their income, home or savings as a security rather than gifting money.
Recognising the affordability challenges many borrowers face is crucial in today’s mortgage market, and lenders play a key role in easing financial pressures. This requires proactive steps to develop innovative products, policy and criteria that help borrowers navigate economic difficulties and expand access to solutions that support their borrowing needs in a sustainable and affordable way. And this is a role which will continue to evolve to reflect ever-changing economic, market and borrowing demands moving forward.
