Affordability

The Mortgage Market Review was implemented on April 26, 2014. One of the key components is the requirement that a firm must not enter into a transaction unless it can demonstrate that the mortgage is affordable.

The Society adopts an approach to affordability assessment which reflects the bespoke nature of its underwriting, requiring the manual intervention of experienced underwriters, exercising their Delegated Lending Mandates on a case by case basis.

The transaction must not be entered into unless affordability of the new or varied regulated mortgage contract can be demonstrated, and the Society as detailed in its Responsible Lending Policy adheres to this.

Income multiples are published by the Society as a general guide to how much an applicant may borrow should their application satisfy the Society’s more bespoke affordability criteria. However in all cases multiples are subordinate to the Society’s affordability methodology which is the prime driver for affordability.

Exceptions:

  • Where the new or varied mortgage regulation contract does not involve the borrower taking out any additional borrowing, other than to finance any product fee or arrangement fee and there is no change in the terms of the regulated mortgage contract likely to be material to affordability, the Society is not required to adhere to the affordability requirements detailed in this policy.
  • Furthermore this affordability policy does not apply to a variation in a regulated mortgage contract made solely for the purpose of forbearance.

Income

  • The Society will assess income net of income tax and national insurance.
  • The acceptable sources of income and the Society’s requirements in respect of sustainable income may be found in the Society’s Standard Criteria for Mortgage Lending.

Income Verification

  • The Society verifies income by obtaining documentary evidence for each element of income used in the affordability assessment, subject to anti-fraud controls. Details of the documentary evidence acceptable to the Society and the period it must cover can be found in the Society’s Standard Criteria for Mortgage Lending.
  • The Society will not accept self-certification of income by the borrower and the source of evidence must be independent of the borrower, though it may be supplied by the borrower e.g. payslips.

Expenditure

The Society assesses expenditure within the three categories detailed within MCOB 11.6.10.

  1. Committed Expenditure – this is the credit and contractual commitments of the borrower which will continue after completion of the mortgage and includes items such as loans, credit cards, child maintenance.
  2. Basic Essential Expenditure of the household – this includes groceries, utilities, council tax, and essential travel.
  3. Basic Quality-of-Living costs of the household – these are items such as clothes, household goods, basic recreation and social activities, which may only be reduced with diffculty.

Expenditure Verification

  • The Society requires the borrower to complete a detailed Income and Expenditure statement which requests stated outgoings for all the above three categories of expenditure.
  • The borrower’s stated Committed Expenditure is corroborated by reference to credit reference agency data and bank statements.
  • The borrower’s stated Essential and Quality of Living Expenditure is reviewed in conjunction with evidence from bank statements and by comparison to the Office of National Statistics (ONS) data.

Future changes to income and expenditure

  • When assessing affordability the Mortgage Underwriter takes into consideration any known future changes in income and expenditure.
  • Changes in income may include an imminent pay rise such as for a newly qualified professional or a reduction in income due to the term extending into retirement. In the case of the latter the Society would exercise its policy for Lending in/into Retirement.
  • A change in expenditure may relate to a loan which is  yet to commence, school fees, or maintenance payments about to start. Alternatively a loan may be due to finish within a short time of the mortgage contract commencing.

Interest Only

  • If the Society is assessing affordability on an interest only basis it must consider as part of the borrower’s Committed Expenditure the cost of the repayment strategy. See ‘Interest Only Mortgages’ for more detail.

Affordability Consolidation

  • The Society will assess affordability on the basis of capital and interest over the term, except where lending under an interest only mortgage in accordance with the conditions stated in the policy above.

 

FOR INTERMEDIARY USE ONLY

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