Income multiples and the challenges of maximising affordability

Even when inflation gets back to the Bank of England’s two percent target, hopefully sometime in 2024, the cost of living will still be significantly above where it was two years ago, and many say their wages haven’t kept up (ONS.gov.uk).

Our own Hodge research shows that over three quarters (76%) of British people continue to be concerned about the cost of living, while a similar percentage (72%) aren’t confident about managing their finances.

Then throw in eye wateringly high interest rates and this new financial landscape means the reality and the perception of affordability, has its challenges for both customers and brokers. The days of brokers using a rule of thumb affordability calculation by multiplying a customer’s income by 4.5 on a calculator, seem almost nostalgic in its simplicity. 

A review of our affordability model this year showed that for an interest only mortgage, a single applicant would need an income of close to £45,000 before affordability would allow at 4.5 times salary. If we did the same for repayment at 4.5 times salary, household income would need to be closer to £90,000.

It then seems no surprise that we’ve seen a number of lenders take the unusual step of advertising to the market they are able to offer enhanced loan-to-income (LTI) offering income multiples of 5 or even 6 times salary.

Models will of course differ between lenders, however it seems there is benefit from further understanding around affordability, stress testing and how loan-to-income (LTI) caps are used.

There’s a need for advisors and lenders to work together to navigate the complexities of borrowers financial stories. To support their clients’ needs, advisors need to be prepared to take the time to understand the full picture and lenders must get comfortable enough with their own appetite to make it worth them listening. Lenders also need to continue to innovate when it comes to assessing and evidencing the ability of a customer to service their mortgage payment.

On a positive note, we should see less volatility in the mortgage market going into 2024, with inflation decreases and more competitive property prices. The takeaway from what we’ve learned in 2023 is that once again, as we settle into another ‘new normal’ and clients’ expectations align with the more realistic economic outlook, we need to work together to ensure the delicate balance of borrowers’ financial constraints and the products available are matched to best serve their needs.

Speak to a BDM today to find out how we can help you assess affordability.