Loan affordability: why has it become an issue and what’s the solution?


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loan affordability

Loan affordability is a serious issue in the current market. An issue which affects a range of debt-based products including personal loans, credit cards, and business loans. But of course, it’s mortgages and the property market that sees some of the most dramatic fallout.

Mortgages are expensive, compared to what they were, at the moment. For many, they’re becoming increasingly unaffordable. And for those who can still invest in the current market, the mortgages that are available to them will likely have very strict criteria.

In this blog, we’ll cover why loan affordability has become an issue, and what impact this is having on the wider property scene.

What’s happened to loan affordability?

Loans and mortgages have become more expensive primarily due to the base rate hikes we’ve experienced. The Bank of England has consecutively raised the base rate at its last 11 votes. When raises happen, retail banks and lenders tend to follow suit.

Currently, there are millions of people in the UK on tracker or variable rate deals. The interest rates on these products tend to rise in line with the base rate. Those on fixed-rate deals may be spared higher costs for now. But they’ll eventually need to remortgage or move onto another product at some point.

Some borrowers who took on a mortgage at near-to-zero rates may soon be forced onto deals exceeding 6% by the end of 2023. Over 1.4 million households in the UK are set to renew their fixed rate mortgages this year, according to the ONS. This could add hundreds of pounds to monthly repayments.

Take, for example, a mortgage of £100,000 which sees an increase from 2% to 6%, assuming a 25-year capital and repayment plan. The monthly mortgage repayment would rise from £424 to £644. Assuming the same increase on a £300,000 mortgage, monthly repayments would rise by £661 – from £1,272 to £1,933.

Source: This is Money, Forbes, ONS

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What about inflation?

Our current cost-of-living crisis doesn’t help with affordability problems. Generally, mortgage lenders will have their own methods for assessing loan affordability. But, they will all engage with comparing your income to a mortgage’s size via income multiples.

On average, high-street banks will provide a mortgage worth 4-4.5 times your salary, so long as all the other criteria is ticked. However, some will only offer as little as 3 times, while others will go as high as 6.

The wider problem with this is that house prices have skyrocketed over the years, yet income has not kept pace. Wages are stagnant. While a lack of supply and other factors pushed demand for property.

To illustrate: total weekly pay in Great Britain rose by around 107% between January 2000 and February 2023. But, during the same period, average property prices rose by nearly 240%. This mismatch will be even more pronounced in places where property prices are particularly high – such as London, Manchester, or Hastings.

With the costs of food, clothing, transport and more jumping, many would-be buyers are likely struggling to afford the basics. Let alone worry about loan affordability or mortgages.

Source: Online Mortgage Advisor, Financial Times, BBC, The Metro, ONS, Land Registry, BBC

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How does this all affect the property market?

Put simply, where loan affordability levels plummet, it hinders demand. If you’re worried about how you’ll afford a mortgage, credit card, or personal loan, you may be less likely to apply in the first place.

Indeed, 94% of recently surveyed brokers say mortgage affordability has become especially complex to manage over the last year or so. Some 89% also said they have work harder now than this time last year to secure the loan sizes their clients want.

The challenge of securing appropriately sized loans will be a nationwide issue too. Over the last 25 years, housing affordability has worsened in every Local Authority in England and Wales. What’s more, mortgage lending has plummeted in recent years, given the higher costs facing borrowers, and stubbornly high house prices.

But, just because we’re collectively struggling against loan affordability, it doesn’t mean participants haven’t tried to find solutions. Brokers have also reported a rise in 30-40 year mortgages from lenders as buyers try to mitigate higher rates.

Also, with the government scrapping its 300,000 a year housing target, Michael Gove has turned to reforming the rental market. Perhaps with the intent of taking pressure off housing demand by making the rental market more appealing for tenants, everything from the scrapping of section 21 through to a “decent homes standard” is in the works.

Source: Financial Reporter, ONS, BBC, Financial Reporter, Property Industry Eye, inews, The Negotiator

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What’s the solution to loan affordability issues?

For property investors facing loan affordability issues, specialist finance may be able to offer reprieve. When we assess a claim, we look at the claimants’ wider circumstances. Rather than solely focus on their income.

Often, bridging finance is secured against property itself. Meaning your income in relation to the property’s value may not hinder your eligibility. We focus primarily on your exit strategy, and the long-term prospects of the investment.

What’s more, specialist finance offers a more flexible option for property investors. As loan affordability became a problem for many, high street lenders tightened their criteria. The future looks uncertain, which make banks nervous.

But, we have never stopped lending since our founding. We’re able to support investors in good times and bad. Even to those who may have missed payments, CCJs, or even bankruptcies on their records.

Also, we’re able to work with complicated setups that may not get very far in the mainstream market. We’re happy to hear from foreign nationals, corporate borrowers, and self-employed buyers.

If you’re worried about loan affordability, or any other property investment issues, we may be able to help.

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