"Many mortgage lenders incorporate ONS spending data into their underwriting processes for affordability reasons, as well as in their online calculators"
In the (good?) old days, mortgage affordability was calculated by multiplying an applicant’s income and would typically be 3.5 times a single income or 2.75 times joint income. Nowadays lenders can take different positions towards affordability, so long as their models can survive stress testing in order to remain on the right side of the regulator.
For example, lenders take different views on certain outgoings; some will deduct pension contributions, others may not. The number of children an applicant has may be taken into account by certain lenders. The list goes on.
Our latest Mortgage Lender Benchmark Report suggests that brokers think that affordability amounts may decline in lenders who use Office for National Statistics (ONS) data for affordability purposes. This data shows the average weekly household expenditure on goods and services in the UK, by age, income, economic status, socio-economic class, household composition and region. It is compiled using data collected on the Living Costs and Food Survey (LCF). The LCF is a UK household survey designed to provide information on household expenditure patterns and food consumption.
Of course, the fact that the data includes energy costs, childcare costs and general living expenses (including food), means that products and services that have either severely affected or been affected by inflation are at the heart of the data being used by many lenders to decide whether a borrower can afford one of their mortgages or not.
Why use ONS data?
Many mortgage lenders incorporate ONS spending data into their underwriting processes for affordability reasons, as well as in their online calculators, for a number of reasons. Firstly, it’s the most comprehensive data there is available and is therefore a standard tool; lenders can be confident that the data they are using is no less accurate than their competitors are using.
Secondly, many high street lenders use automated decisioning for reasons of cost, speed and conservatism; it’s a volume business for them and there’s no pressing need to move up the risk curve and consider any individual circumstances to make a mortgage decision. To that end, the ONS data can be plugged into their systems and used as the basis for its affordability calculations.
Alternatively, many providers use the ONS data as a starting point, and then those who manually underwrite, such as specialist mortgage lenders and smaller building societies, may look at the borrower's actual costs.
It is worth remembering that the ONS data takes an average view and that the majority of people will not be average.
Looking to the future
There are reasons to believe that some lenders may make a different view in the coming weeks and months. I suspect the consensus view among mortgage brokers is that affordability amounts will decline because of the cost of living crisis and especially spiralling energy costs.
While mortgage providers have a duty of care to lend responsibly, and each lender will have their own risk appetite, energy costs are so high they will inevitably tighten the borrowing potential of consumers. For that reason it will be interesting to see whether ONS data will continue to be applied by so many lenders: with the energy cap rising later in the year and the resultant increase in ONS household spending data, it might be more widely used or it could make lending impossible.
This is where mortgage brokers can prove their worth. When placing cases they should make themselves aware of which lenders do and do not apply this rule of averages, as depending on the client they may decide that using averages could favour the application or they may be better off avoiding providers who use ONS data for their lending decisions. This could easily mean the difference between a client getting a mortgage and being rejected for one on the grounds of affordability.
Indeed, borrowers going direct could well face ONS data-based automatic decisioning systems and, after a series of rejections, come to the conclusion that they simply won’t get a mortgage anywhere. Mortgage brokers could help them see otherwise.
