MBT Affordability Insights: Debt and mortgage affordability

Most lenders have a ‘debt threshold', over which affordability is marked down substantially. This debt threshold differs substantially between lenders and even between applicants, depending on the size of the total income concerned. Even with a £100k+ income this threshold can be surprisingly low and will of course depend on overall credit score.

Credit card debt can be particularly sensitive to the ratio between available credit limits and actual levels of debt, so if a client is up to or close to their limits, it is likely they will have a lower credit score. This is likely to increase over the coming months as borrowers build larger balances on their cards and not all lenders will automatically increase borrower limits. The other issue is that many affordability calculators do not take this into account. It often only comes up at the DIP stage, so this is difficult to predict accurately.

Another issue is not only the level of debt, but also the ratio between this and total income, known as the debt-to-income ratio. This can easily result in a declined case and will usually only occur at the DIP stage at the earliest. Some lenders publish their debt-to-income ratio, so brokers can check, but it normally only surfaces at the DIP stage. One or two lenders actually build it into their affordability calculators, which is very helpful.

Remortgaging to repay debt is likely to become increasingly common as clients feel the pinch, but this can be beset with its own set of problems. Many lenders impose maximum LTV limits for debt consolidation (usually max 80%) and both of the above scenarios come to the fore for this type of remortgage.

Some of the major lenders assume that the debt will be taken out again post completion and therefore leave it within their affordability calculation anyway. Others just don't have the appetite for this type of client and set the bar very high. However, there are a number of lenders that don't share concerns about debt consolidation to the same level and are happy to help in this scenario. These lenders are likely to become busier in the coming months.

With higher levels of debt and a squeeze on finance all round, some clients will inevitably 'drop the ball' on their payments, which will show in their credit files. This could present a whole new set of challenges for clients and lenders alike. We shall have to wait and see how it all pans out.