Knowledge is power – so in 2020, we took the decision to empower more brokers and lenders with the latest affordability knowledge and trends through the launch of the MBT Affordability Index.
MBT Affordability reached 10 million searches on cases worth over £80 billion by the end of 2020, and a natural by-product of all of these searches was rich data about what brokers were looking for on behalf of their clients, and how lenders were able to help.
We launched the MBT Affordability Index in September 2020 but tracked data back to January. So, having had the opportunity to analyse a full year of affordability trends, what have we learned?
Affordability became a key lever for lenders
One of the most interesting trends of 2020 was how affordability became a key lever for lenders in controlling business volumes. Traditionally rate has been changed by lenders as a means of growing or tempering lending levels, but increasingly lenders are also using criteria and affordability calculations.
In the second half of 2020, when customer demand was high and lender service was under pressure, we saw around three to five changes to affordability calculators every week.
Lockdown 1 drove a big contraction in affordability
The average maximum loan offered by lenders dropped from £266,270 in March to £247,400 in April and remained low until July, representing the deepest and longest contraction in affordability we have seen to date.
It then went on to peak in September, at £270,800, and has yet to fully recover as lenders closely monitored business inflows and service levels in the final part of the year. In December the average maximum loan offered was £254,000 – more than 6% down on the peak in September.
Correct choice of lender is vital
Throughout 2020, the difference between the average maximum loan offered to customers and the average minimum loan was £116,220. The average difference peaked in March at £140,550 as lenders moved at different speeds in updating their affordability calculations. This is a big difference based on the same set of circumstances and could significantly influence your clients’ options and choices.
Throughout the year we saw the Affordability Gap – the percentage of cases where no lender was able to offer the amount requested by a customer – drop from peaks of 29% in February and May to 20% in November and 21% in December.
One of the reasons for this drop in the Affordability Gap is that more lenders have been added to MBT Affordability as the year has gone on, and this demonstrates the importance of researching all of the options for a client. It’s not just enough to check with the mainstream banks – the affordability landscape is becoming more complex with a wider variety of lenders that offer the best solutions for different circumstances.
Data from MBT Affordability in September shows that there were only one or two lenders able to provide the loan size requested by brokers on 13% of all searches. Where lenders were able to meet the requested loan amount on these cases, 71% were smaller lenders and only 29% were larger mainstream lenders.
First-time buyer options have narrowed
As part of the MBT Affordability Index we track the affordability trends for different customer types, including first-time buyers, remortgagors and home movers.
The most notable trend has been how the spread of available options has tightened for first-time buyers. In March, the average maximum loan available to first -time buyers peaked at £277,645, while the average minimum available loan was £134,700 – a spread of £142,945.
By June the average maximum loan had dropped to £235,401 and the average minimum loan had increase to £181,333 – reducing the spread to £54,068. This has since loosened slightly, but not to previous levels. In December, the spread between maximum average loan amount and minimum average loan offered to first-time buyers was £72,870. The same spread was £129,336 for home movers and £127,143 for remortgagors.
A big driver of this is LTV and lenders increased caution around higher LTV loans throughout the year, with many reducing maximum LTVs to 85% and below. In fact, only 7% of cases in December requesting 95% LTV or more would have been offered a loan based on affordability.
Affordability for the self-employed remains a key focus
Covid-19 has delivered a period of significant challenge for businesses and a consequence of this is that lenders are taking a more cautious approach in underwriting affordability for the self-employed, with measures such as restricting maximum income multiples, limiting LTV and tweaking other elements of the calculation. As a result, the underwriting of variable self-employed income has become even more detached from standard salaried employment, making it more difficult for brokers to stay in touch with changes in the market. This is a trend that looks set to continue and so, as we move into 2021, we will be tracking self-employed affordability as a new category within the MBT Affordability Index.
Tanya Toumadj is CEO at Mortgage Broker Tools