Mortgage Market Review and Its Impact on Shared Ownership
The new mortgage affordability guidelines introduced in April 2014 as part of the Governments ‘Mortgage Market Review’ (MMR) are now well and truly up and running. And while, on the whole, affordability based mortgage lending is a good thing, it has caused some anomalies between what the Homes and Communities Agency (HCA) view as being affordable and the lenders viewpoint on affordability.
We’ve asked one of our panel mortgage advisers, De Havilland Group Limited, to review the impact of the Mortgage Market Review on applicant affordability for Shared Ownership homes.
Calculating the debt to net income ratio
The HCA guidelines state that an applicant’s mortgage, rent and service charge, when added together should be between 30% and 45% of their disposable income after taking into account, tax, National Insurance and any credit commitments – This is known as the ‘debt to net income ratio’ (DTNIR). Up until April last year, an adviser could look at the HCA affordability, and providing the DTNIR was below 45% and all applicants were working, they could take some confidence that the application would fit affordability with a mortgage lender. Since MMR, this is no longer the case as other commitments such as travel and pension are taken into account by some lenders. In addition to this most lenders restrict their affordability still further where the applicants have children.
In addition to all this, lenders now have a ‘stress test’ interest rate that they use to calculate affordability. Put simply, this means that you as an applicant will look at the monthly cost of your mortgage and see that it is easily affordable as interest rates, on the whole, are quite low. A lender however, will look at your affordability at a much higher interest rate, so as to ensure your future affordability.
This is not necessarily a bad thing but as advisers we often find ourselves having a balancing act between satisfying the HCA’s guidelines and actually finding a lender who will accept that level of borrowing.
How this works in practice
I recently had a case of a couple where the husband was earning a good wage, his wife was working part time so as to keep child care costs down for their two children, but also doing a fair amount of overtime as relatives were helping out now with childcare as and when they were able. The HCA calculator said that a 30% share would produce a DTNIR of just 38%. So far I have been unable to find a lender willing to give them a mortgage as they are failing affordability. Many housing associations have a minimum share value of 30%, so it is now unlikely that this couple will be able to proceed, whereas pre MMR they would have got a mortgage agreed for a 45% share with a DTNIR of 43%.
Fortunately, the case mentioned above is an infrequent anomaly, and housing associations are mostly willing to work with customers on this issue provided that the application remains within their internal guidelines and those of the HCA, but if the mortgage lenders tighten their affordability models even tighter, the HCA may have to develop a new way of assessing affordability.